Fast Retailing (TSE:9983) Faces A Valuation Test After Weaker August Sales

Fast Retailing (TSE:9983) drew fresh attention after reporting weaker August sales, which coincided with a modest pullback in the Nikkei 225 and muted trading across Asian markets.

Fast Retailing’s recent August sales update has come after a softer patch, with the share price down 10.11% over the past 30 days and 12.20% over 90 days, even though the year to date share price return is 20.85% and the 1 year total shareholder return is 43.82%. This suggests that longer term momentum has been stronger than the short term reaction to the latest numbers.

Compare Fast Retailing's recent pullback with other companies that screen well on quality and value by reviewing the curated 25 high quality undervalued stocks list.

Fast Retailing now trades below the average analyst price target, yet some investors clearly prefer to wait after the August sales update. Is that gap a genuine discount or a fair reflection of the current caution?

Price-to-Earnings of 40.8x: Is it justified for Fast Retailing?

By most conventional yardsticks, Fast Retailing currently trades on a rich P/E of 40.8x, which sits well above both its peer group and a fair value benchmark suggested for the stock.

The P/E ratio compares the current share price with earnings per share, so a higher figure usually means investors are willing to pay more for each unit of current profit. For a company like Fast Retailing, which has global brands and a sizeable international footprint, a higher P/E often reflects expectations that earnings will continue to grow and that profitability will remain resilient.

Recent data shows earnings growth of 30.6% over the past year, ahead of its 5 year average of 20.1% per year and above the Specialty Retail industry at 8.8%. Earnings are also forecast to grow 10.9% per year, with revenue forecast to grow 10.4% per year, which is faster than the broader JP market at 6.1% per year. Those trends help explain why the market is willing to put a premium multiple on Fast Retailing, even as its Return on Equity is expected to be 19.8% in three years, which is described as low relative to the threshold used here.

However, that 40.8x P/E is expensive compared with the JP Specialty Retail industry average of 13.7x and also above the peer average of 17.8x. It is also higher than an estimated fair P/E of 34.1x, which implies the price level could move closer to that lower ratio if sentiment or growth expectations cool. In short, the current valuation leans heavily on Fast Retailing continuing to justify a premium earnings profile.

Explore the SWS fair ratio for Fast Retailing

Result: Preferred multiple of Price-to-Earnings of 40.8x (OVERVALUED)

However, investors in Fast Retailing also need to consider risks such as any sustained slowdown in key regions like Greater China and a potential reset in market expectations around premium P/E multiples.

Find out about the key risks to this Fast Retailing narrative.

Another view on Fast Retailing using the SWS DCF model

The SWS DCF model presents a different perspective on Fast Retailing. With the share price at ¥69,100 and the model suggesting a value of ¥38,896.16 based on future cash flows, the stock appears overvalued from this standpoint. Which signal do you pay more attention to right now?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Fast Retailing for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 25 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

This mix of enthusiasm and caution around Fast Retailing is clear. Move quickly, review the numbers yourself and weigh the 3 key rewards and 1 important warning sign

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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