Should you buy shares of Baby Bunting Group Ltd?

Credit: Oberazzi

Baby Bunting Group Ltd (ASX: BBN) made a huge splash when it listed its shares on the ASX in October last year.

From a $1.40 offer price during the initial public offer (IPO), the shares quickly rocketed to a high of $2.74 as investors embraced the ‘baby-boom’ being experienced on the ASX. This was bolstered by incredible performances from infant formula producers Bellamy’s Australia Ltd (ASX: BAL) and a2 Milk Company Ltd (Australia) (ASX: A2M).

The shares have tempered off somewhat since hitting that high in February, but still remain a healthy 75% above their listing price at $2.45 as at Friday’s close. That compares to a 5.3% gain for the ALL ORDINARIES (Index: ^AXAO) (ASX: XAO) during the same time.

The retailer, which mostly caters to parents with children up to the age of three with items such as prams and toys, has only delivered one set of earnings results since it became public, but the results were certainly strong.

Sales rose 30.3% compared to the prior corresponding period to $108.2 million, with same store sales (SSS) up an impressive 9.2%. Earnings before interest, tax, depreciation and amortisation (EBITDA) were up 50.6% to $7.8 million, with four new stores opening during the period, bringing the company’s total store count to 35.

What’s more, it expects its results to pick up a notch in the second-half. Sales are expected to fall in the range of $225 million to $235 million, with pro forma EBITDA between $16.5 million and $18.5 million. This is partially thanks to an uptick in SSS which the company noted had risen to 11.2%, year-to-date, as at 31 January, 2016.

Those are some very strong sales figures, particularly given the conditions in the global economy right now, and go a way towards explaining why Baby Bunting’s share have skyrocketed since they listed on the ASX. Uncertainty remains high in the economy, however, and it will be interesting to see whether or not that has impacted the company’s growth for the remainder of the second half.

Investors also need to remain mindful of how much they’re willing to pay for Baby Bunting’s shares. According to the group’s prospectus, it expects to achieve pro forma net profit after tax (NPAT) of $9.1 million in the 2016 financial year which would give its shares a price/earnings ratio of roughly 33.8x.

Given that sales are expected to be tracking ahead of prospectus forecasts (it expected $218.6 million in sales, at the time, compared to around $230 million as of February), I would expect NPAT to come in above that target, suggesting its price/earnings ratio won’t be quite that high.

Meanwhile, earnings should also continue to grow in the coming years as it rolls out new stores and improves its operating efficiencies, but the high earnings multiple is still something investors should be aware of before committing to a purchase.

Free Report: Why These 3 Blue Chip Shares Are Set to Soar

Discover The Motley Fool's Top 3 blue chips for 2016. These 3 'new breed' shares pay fully franked dividends AND offer the prospect of significant capital appreciation. Simply click here to gain access to this comprehensive FREE investment report.

No credit card required!

Motley Fool contributor Ryan Newman owns shares of Bellamy's Australia. The Motley Fool Australia owns shares of A2 Milk and Bellamy's Australia. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

HOT OFF THE PRESSES: My #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

Simply enter your email now to receive your copy of our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2017.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.