Morgan Stanley | For the first time since its flotation (17 years ago), we put the recommendation as Sell (underweight) with an Objective Price which falls from 26 to 21 Euros.
We believe that the arguments for investing in Inditex are weakening, and they lie neither in the expected numbers nor in the multiple assumed by the market. After opening 6,000 new shops and expansión into 63 countries since its flotation, it is entering a phase of maturity.
The guidance for growth in new space was already reduced at the beginning of the year (for the second time in two years): It will only grow 3-4% annually and moreover this new space comes above all from outside the Eurozone, which makes it ever more sensitive to currency variation.
The like-for-like trend remains solid, but the density of sales is less now than a decade ago. Margins have fallen in each of the last five years and cumulatively we have reduced our estimations of profits by 19% in the last three years. In part this results from currency variation, but it also seems to us a reflection of the fact that not even Inditex is immune to the problems of the rest of the clothing industry.
We have updates our estimates and now expect growth in profits from combined anual growth (CAGR) of only 4% in the nest five years, which puts us 12% below the consensus for 2021. We do not believe the current multiple of 23X P/E is sustainable to the extent that the market is discounting that Inditex already only offers single digit growth in EPS.
It remains one of the best business models of the companies we cover, but it is not what it was. We believe that now is the time for the share price to begin reflecting it.
We recall that the analysis firm RBC issued a bad report on Inditex: it reduced the Objective Price for its shares to 34 euros from 34 and cut its profit estimate for 2019 by 3%, also pointing out the exposure of the company to currency variation.