Retail showdown: Sports Direct International plc vs NEXT plc
On one hand, Next is commonly cited as being the UK's most successful and dependable retail company. Investors have been willing to pay a premium to get their hands on the company shares. While on the other hand, shares in Sports Direct have been on a wild ride over the past 24 months as the company has faced a deluge of criticism.
Looking at the two stocks now, Next appears to be a high quality growth investment, which prioritises cash returns to investors. Meanwhile, Sports Direct has all the traits of a contrarian value play.
Two different groups of investors
After the events of the past 24 months, Next and Sports Direct will now appeal to two very different groups of investors. Shares in sports direct are currently trading at a historical P/E of 8.3 compared to Next's historic valuation of 11.5.
However, City analysts are expecting Sports Direct's earnings per share to collapse by a third next year implying that the group is trading at a forward P/E of 12.5, while shares in Next are currently trading at a forward P/E of 11.4.
Sports Direct's outlook is extremely cloudy but the company has a history of outperforming City expectations and some indicators have shown that the firm's sales haven't suffered from the recent bout of negative publicity. In other words, there's a chance that Sports Direct could outperform city expectations for growth over the next 12 months. If the company does indeed outperform then investors could be set for a rich payoff as the shares rerate
Unfortunately, there's no guarantee Sports Direct will beat city expectations this year, and there's always the risk that the company could undershoot growth forecasts. And as shares in the company have already lost around two thirds of their value over the past 12 months most investors are likely to err on the side of caution when it comes to evaluating the business.
A safer play on retail
All in all, Sports Direct may be too speculative for some investors. Next is a safer retail investment. Indeed, the company's valuation isn't overly demanding at present and while management has warned that the current trading environment is tougher than expected, the business is still pushing ahead.
Even without growth, Next is well placed to reward shareholders. The group's wide profit margins make it extremely cash generative and the majority of this cash is returned to shareholders via dividends and share buybacks.
Last year the company returned 380p per share to investors via regular and special dividends for a yield of 7.7%. This year, analysts are expecting a regular dividend of 190 per share for a yield of 3.8% although based on the company's past history, I wouldn't rule out additional special dividends later in the year.
The bottom line
So overall, Next and Sports Direct are two different companies for two different classes of investors. Sports Direct is the more speculative investment while Next is the slow and steady retail giant. Deciding which one fits best in your portfolio will depend entirely on your risk tolerance.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Sports Direct International. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.