Should You Invest in Baby Bunting?

There are only two things you can rely on in life: death and taxes. Oh, and for most of us, babies. In 2014 Australia had a birth rate of 1.8. This means Aussie women have an average of 1.8 babies. While this might sound high, it was actually down from 1.88 babies per women in 2013.

But even though our population is continuing to grow, our birth rate seems to be dropping. Yet it hasn’t stopped Australia’s biggest baby goods chain, Baby Bunting [ASX:BBN].

The Group targets parents of children aged 0–3. They sell the usual baby products you would expect — prams, cots, nappies and car seats. And even though fewer babies are being born, our thirst to buy toddler related paraphernalia hasn’t stopped.

And it’s easy to see why this industry might encourage parents to spend more. They are buying products for their own babies. And this, of course, demands only the highest quality.

Regardless of our inclination to spend, Baby Bunting was able to generate sales of $236 million for the financial year. This represented a 31.4% increase on the prior corresponding period. The Group also achieved strong comparable store sales growth of 12.5%.

Matt Spencer, CEO of Baby Bunting, said in an announcement that ‘The 2016 financial year was a significant year for Baby Bunting with the Company’s ASX listing in October 2015, the opening of five new stores and the roll out of new initiative to improve the customer experience both in stores and online.

The strong trading performance we experienced in the second half of the 2016 financial year has continued into the start of the current financial year,’ Spencer said. And the company now expects a boost to earnings between 15% and 31% for FY17.

The company posted a gross profit of $81.2 million for FY16, up 31.2%. And they are now planning to ramp up new store openings.

The company currently has 36 stores, with the plan of running 70. But, due to their overly positive performance, Baby Bunting has now increased their target to 80 stores. This means they’ll be opening between four and eight new stores each year.

Should you invest in baby products?

As mentioned above, Baby Bunting only listed in October last year. The company initially offered shares for $1.40. Since then, they’ve climbed more than 114.3%, to $3 per share.

But there’s no point in fantasying what you could have invested in. Rather, we want to know if this current trend will continue for the future. And when it comes down to it, it’s all about financials.

It was their extremely strong sales and plans for growth that spurred the share price to climb. So if you believe Baby Bunting can return a strong reliable pattern of growth, it’s a no brainer, you invest.

But this just raises more questions.

We are now faced with the problem of figuring out whether earnings will be stable or not. This again isn’t something you just know off the top of your head. But if we use Baby Bunting’s current profit margin and price-to-earnings (P/E) ratio, we might get a general idea about future earnings.

The company’s latest profit margin is 4.47%. This is a measure of how many revenue dollars the company can convert into profits. Their current P/E ratio is 67, which essentially means shares are trading at 67-times earnings.

For most investors, the extremely high P/E ratio would have already turned them off. But let’s just do the calculations for fun.

According to Bloomberg, Baby Bunting is expected to generate revenues of $274.75 million in FY17. Let’s assume they can turn 4.47% of the above into profits. This means that, for FY17, Baby Bunting could potentially generate profits of $12.28 million.

Therefore, if the P/E ratio stays the same, the company’s share price could be as high as $6.57. But take this as a very general measure of where the share price could be in a year’s time.

No one knows what will happen in the future. However, the best thing you can do is research and be prepared.

Härje Rönngård,

Junior Analyst, Money Morning

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