Baby Bunting Group Ltd share price up 75% from IPO price: Can its great run continue?

Credit: Steve Jurvetson

The share price of Baby Bunting Group Ltd (ASX: BBN) has soared since the company first debuted on the ASX at $1.40 on 14 October. The shares are now fetching $2.45, representing a 75% gain in less than two months. That compares to a mere 1.1% rise for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

Who is Baby Bunting?

If you have children, it’s highly likely that you’re familiar with this company. Baby Bunting is Australia’s largest specialty retailer for baby goods, offering products for children up to the age of three. That includes items such as prams, nappies, cots and other nursery furniture, food, babywear and a wide selection of toys.

What is driving the share price?

We are in the midst of a baby boom which should provide plenty of growth for Baby Bunting for years to come. What’s more, Baby Bunting is rolling out new stores and aims to have over 70 stores open over the next five years, up from roughly 33 stores today.

Of course, there are risks to roll-out strategies, as highlighted most recently by Slater & Gordon Limited (ASX: SGH). However, the circumstances are different (Baby Bunting could achieve scalability and greater margins by expanding its store count) and Baby Bunting has consistently grown sales, showing the strategy has worked well for the group thus far.

Indeed, according to the prospectus, sales have grown at a compounded annual rate of 24% since the 2009 financial year, with a further 21.3% growth forecast this year. Earnings before interest and tax (EBIT) are also growing very strongly.

Baby Boom

Of course, it’s also likely that investors are willing to pay more for Baby Bunting’s shares based on the performance of companies like Bellamy’s Australia Ltd (ASX: BAL) recently.

Bellamy’s share price has exploded over the last 12 months as demand for its infant formula has soared. The A2 MILK FPO NZ (ASX: A2M) share price has also grown strongly recently, as has that of Blackmores Limited (ASX: BKL) which is exploring a push into the industry.

While Baby Bunting could also have a very successful future, it is important that investors compare Baby Bunting to other retailers more so than it is compared to companies like Bellamy’s.

Should you buy?

Baby Bunting’s shares are by no means cheap – at their current price tag, they’re trading on a price-earnings ratio of roughly 32.3x forecast earnings. However, the company has certainly demonstrated its ability to grow sales and earnings which could justify that price, meaning Baby Bunting could still be worthy of closer inspection for long-term investors.


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Motley Fool contributor Ryan Newman owns shares of Bellamy's Australia. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia owns shares of 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.

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