WH Smith share price forecast: is it a strong buy?
12:32, 31 August 2020
The WH Smith PLC (LON: SMWH) share price has plummeted 51 per cent in the past year and 47 per cent in the past three years, so is it a strong buy now? From the fundamentals, there is a big likelihood that this stock is heading for a strong rebound, at least in the long run.
First, it has a return on equity (ROE) of 46 per cent, which is higher than the industry's average of 12 per cent. However, the high ROE has done nothing to boost WH Smith's five-year net income growth. This mostly implies that the company has a high payout ratio or poor capital allocation.
If that’s the case, the recent restructuring may translate into a major boost as more capital will be freed for growth. WH Smith has recently announced a restructuring plan that involves cutting up to 1,500 jobs.
The stock price has responded positively to this news but it remains to be seen if this will last long. RBC Capital has trimmed the WH Smith stock price target from 1,400p to 1,250p due to the impact of the coronavirus pandemic on its revenues.
The company operates a chain of high street, airport, railway station, hospital, port and motorway service station shops selling books, magazines, stationery, newspapers, confectionery and entertainment products. Most of its stores have already reopened and sales are increasing by the day as the travel industry continues to grow.
Even so, the ripple effect of the pandemic is likely to be felt for at least a year if the covid-19 curve continues to flatten at the current rate.
WH Smith stock forecast: a good bet for long-term investment?
Some analysts believe that this may be the time for value investors to buy even though they will have to bear the short-term fluctuations caused by coronavirus-related news.
Data from Wallet Investor shows that this stock is a bad one-year investment. The stock is likely to maintain high volatility, and there is a likelihood that it will trade slightly lower than it is trading now. As of August 26, 2020, the WH Smith share has a 52-week high of 2,660p and a low of 584.04p. Analysts estimate that it will trade between 1,080p and 2,950p in the next three years.
It’s worth noting that the company's earnings grew by 10.8 per cent over the past year and are expected to grow by 63.34 per cent in the next year. According to Simply Wall Street, the forecast earnings growth is above the savings rate of 1.2 per cent.
Consequently, the risk could be worth it and can never compare with the rate of return an investor would get on a low-risk government bond. Moreover, WH Smith PLC earnings will grow faster than the UK market, which is anticipated to grow at 23.2 per cent per year. This makes the stock highly competitive when compared to its rivals.
WH Smith PLC has a good value based on its price-to-earnings ratio of 11.3x compared to the industry’s average of 18.5x. Price-to-earnings ratio measures the current share price relative to its per share earnings (EPS). PE ratio that is lower than the industry’s average indicates that the stock is undervalued.
This stock is a strong dividend payer and hence is highly attractive for long-term investors looking for cash flow and steady long-term growth. The latest WH Smith PLC dividend was paid out in January at 41p per share, translating to a yield of 1.86 per cent.
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High debt-to-equity ratio but favourable conditions
WH Smith PLC has used debt capital aggressively at a debt-to-equity ratio of 0.91. This is higher than close competitors and implies that the company’s earnings are likely to remain volatile due to the additional interest expense.
Even so, the coronavirus-triggered inflation is likely to push interest rates down in the coming days hence reducing the interest payouts. Analysts estimate that global inflation will increase gradually from 0.9 per cent in 2020 to 2.3 per cent by 2025.
Interest rates will also remain low in 2020/2021 and short-term rates will remain near zero through 2026. With the favourable conditions and the anticipated earnings growth, WH Smith PLC has a chance to tackle the debt without passing the heat on to investors.
However, this will depend on its aggressiveness in cutting costs and maximising potential. The 1,500 job cuts may be the first big step in the right direction.
WH Smith PLC high volatility and CFDs trading
WH Smith PLC is an extremely volatile stock with a one-year beta of 2.10 and three-year beta of 1.84. This means that it is likely to be more volatile than the stocks in both the bull and the bear markets.
Its close competitors, Office Depot Inc and Valora Holdings AG, have a one-year beta of 0.62 and 1.16 respectively. WH Smith PLC’s high volatility makes it a good bet for CFDs trading. CFD trading involves speculating on price changes of an asset and hence presents a great opportunity in highly volatile market conditions.
WH Smith PLC share price forecast – bottom line
This stock seems like a good bet for long-term investing and CFDs trading. Analysts agree that there is great potential in the long run (3+ years) given the strong revenues and earnings projections.
The coronavirus pandemic will continue to negatively affect the stock for the next 12 months, but a rebound is likely to happen if the current market trend continues. This stock is highly volatile and hence presents great potential to CFD traders as well.
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