Could Ltd be worth another look at this share price?

The Ltd (ASX: KGN) share price is up 4% so far in trading today to $1.56, still a long way below its IPO price of $1.80.

In its latest quarterly results, the online consumer electronics retailer reported that it was beating expectations on:

  • Revenues by more than 10%
  • Gross profit by more than 20% and
  • Pro forma earnings before interest, tax, depreciation and amortisation (EBITDA) by more than 30%

Kogan ended the first quarter of the 2017 financial year (FY17) with cash of $31.7 million.

Founder and CEO Ruslan Kogan says the company was pleased with the performance.

“We believe is well placed to increase inventory levels next quarter to capitalise on the Christmas trading period.”

In August, Kogan beat most of its prospectus forecasts for revenues, profit, margins, EBITDA and net profit for FY16, but didn’t update its forecast for FY17.

In the prospectus, Kogan was expecting revenues of $241.2 million, EBITDA of $6.9 million and a net profit after tax of $2.5 million. In FY16 those figures were $211.2 million, $4 million and $0.8 million respectively.

On that basis, Kogan’s share price is hugely expensive. That’s a P/E ratio of 58.2x. By comparison, the company’s chief rival JB Hi-Fi Limited (ASX: JBH) trades on a P/E ratio of 21.7x. Harvey Norman Holdings Limited (ASX: HVN) sports a P/E of 16.8x.

Now Kogan may be growing faster than its two competitors, and without any bricks and mortar stores should be able to keep its cost of doing business (CODB) much lower. There’s no rent, distribution or excess sales staff costs for Kogan.

However, the lack of physical stores could be a hindrance to Kogan delivering strong growth, since it also has to compete with thousands of online-only retailers who also have the same advantages over traditional bricks-and-mortar retailers.

Should ramp up its efforts in Australia like it has in its home country of the US, Kogan’s business is much more at risk that the likes of JB Hi-Fi.

Foolish takeaway

Despite the attractiveness of Kogan’s model and ability to expand into other channels like mobile phone plans, we also need to consider what can happen to online-only retailers.

Surfstitch Group Ltd’s (ASX: SRF) share price plunge from a high of $2.13 to today’s price of 19 cents and Temple & Webster Group Ltd (ASX: TPW) fall from 97 cents to 15 cents illustrate what happens when they get it wrong.

I’m not saying that will happen to Kogan, but the current price means any slip-ups, no matter how small, and Kogan’s share price could plummet. A P/E of 22x (similar to JB Hi-Fi) implies a 62% fall in Kogan’s share price to around 59 cents.

Buyer beware.

How 1 Man Turned $10K Into Over $8 Million

Discover how one man turned a modest $10,600 investment into an $8,016,867 fortune. Learn more about this man and how you can start down the path toward financial independence. Simply click here to learn more. No credit card required.

What are you waiting for?

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

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.