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This share’s rocketed 14% today! Is it time to buy it for your ISA?

Royston Wild
Businessman leading a chart upwards

2019 has proved to be a nightmare for AO World (LSE: AO) and its stockholders. The electricals giant has seen its share price halve since the turn of January to around 65p as it’s had to battle a challenging environment in its marketplaces in mainland Europe as well as here in Blighty. But investors had rare cause for cheer in Tuesday trading when the release of interims caused its share value to leap 14%.

It’s not that AO World provided much to celebrate on the trading front. In the UK, like-for-like sales rose 4.5% in the six months to September (excluding the contribution of its recently-acquired AO Mobile unit), but in Germany and the Netherlands these dropped by a collective 3.4%. As a result of these problems adjusted EBITDA losses at the business widened to £6.2m from £5.4m a year earlier.

Shuttered!

The market breathed a sigh of relief, however, when the retailer announced it was shuttering its Dutch unit — which made an adjusted EBITDA loss of £2.8m in the six months to September — during the second half of the current fiscal year at a cost of €3m.

Chief executive John Roberts said that closing down in the Netherlands “will enable us to concentrate on the transformation of our German business.”

A step in the right direction, clearly. But could investors be a little hasty in piling back into AO World en masse today? I think so.

Question marks remain

Firstly, let’s look at the retailer’s performance in its core British operations. Roberts commented today that “there are encouraging green shoots of profitable growth across our UK business,” but I am not so convinced that this is the beginning of a tentative recovery rather than a false dawn.

As I said at the top of the piece, retailers on the high street, in shopping malls and in cyberspace have all suffered as worsening economic conditions have bitten into consumer spending habits. And there’s no sign that the malaise is anywhere near over just yet — indeed, latest Office for National Statistics data showed retail sales in the UK rising just 0.2% in the three months to October, the worst rate of growth since spring 2018.

Moreover, I am also less than assured by the rationale behind AO World’s decision to acquire Mobile Phones Direct late last year to help pull it out of a hole. As Dixons Carphone will attest, trying to convince shoppers to pile into the latest Apple iPhone or Samsung Galaxy is hard work nowadays as the peer pressure to be seen carrying the latest handset has gone the way of the dodo.

Forecasts in danger?

City analysts expect AO World to report losses of 0.1p per share in the financial year to March 2020, but to bounce back into the black with earnings of 1.3p in fiscal 2021. This looks a little optimistic though, and the retailer’s toppy valuation — it trades on a forward P/E ratio just shy of 50 times for next year — leaves it in danger of fresh share price slippage should brokers start chopping down their forecasts.

And with tough political and economic conditions in the UK looking set to persist through 2020 at least, and Germany’s economy cooling sharply as well, this is a very real possibility. In my opinion, AO World remains a share to be avoided.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Apple and recommends the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019