CEPS plc (AIM:CEPS), a GBP£6.80M small-cap, operates in the consumer discretionary industry, whose sales are driven primarily by consumer sentiment and access to capital. These macro factors tend to determine the rate at which consumers purchase luxury goods. Consumer discretionary analysts are forecasting for the entire industry, a strong double-digit growth of 15.02% in the upcoming year , and an enormous growth of 40.78% over the next couple of years. This rate is larger than the growth rate of the UK stock market as a whole. Below, I will examine the sector growth prospects, as well as evaluate whether CEPS is lagging or leading in the industry. View our latest analysis for CEPS
What’s the catalyst for CEPS’s sector growth?
E-commerce continues to be the fastest growing sales platform for consumer discretionary goods, changing the landscape for retailers. A large number of store closures and bankruptcies illustrates the shift in consumer preferences and increasing online competition. Over the past year, the industry saw growth in the twenties, beating the UK market growth of 11.30%. CEPS lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means CEPS may be trading cheaper than its peers.
Is CEPS and the sector relatively cheap?
The luxury goods industry is trading at a PE ratio of 29x, above the broader UK stock market PE of 19x. This means the industry, on average, is relatively overpriced compared to the wider market. However, the industry did return a higher 24.72% compared to the market’s 12.78%, which may be indicative of past tailwinds. Since CEPS’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge CEPS’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? CEPS has been a luxury goods industry laggard in the past year. If your initial investment thesis is around the growth prospects of CEPS, there are other luxury goods companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how CEPS fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If CEPS has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its luxury goods peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at CEPS’s future cash flows in order to assess whether the stock is trading at a reasonable price.