Next stock jumps on UBS upgrade, PT raised to 11,700p

Investing.com -- Next plc (LON:NXT) shares jumped over 3% on Friday after analysts at UBS Global Research upgraded the stock to ’Buy,’ citing stronger midterm growth prospects and a de-risked near-term outlook. 

The analysts raised their price target for Next to 11,700p from 10,500p, pointing to a widening competitive moat and a higher earnings trajectory.

UBS analysts believe Next is at an inflection point, with its profit before tax expected to grow at a compound annual rate of 7% over the next five years, compared to a pre-pandemic average of 4%. 

Buybacks are expected to amplify this to a 9% annual increase in earnings per share. The firm also noted that Next’s conservative guidance for 2025 and a strong history of outperforming its own forecasts make it a relatively safe bet in an uncertain retail environment.

A key driver of Next’s growth is its overseas expansion, where the company currently holds a market share of less than 1%. 

UBS pointed to strong web traffic growth, increasing SKU density, competitive pricing, and category expansion as evidence that Next has significant room to grow in international markets. 

The brokerage expects overseas full-price sales to rise at a 14% annual rate, with earnings before interest and taxes growing at an even faster 18% as efficiency improves in its Middle East and European hubs.

Next’s Total (EPA:TTEF) Platform segment, which provides e-commerce and logistics services to third-party brands, is also poised for stronger growth. 

With a 50% increase in capacity and improved unit economics following the full operation of its Elmsall 3 warehouse, the company is no longer constrained by logistical bottlenecks. 

UBS sees clear opportunities for Next to accelerate the rollout of new TP clients in the coming years.

The analysts flag the retailer’s strong cash flow generation, which allows for both investments and share buybacks. 

While UBS prefers investments due to Next’s high return on capital, they anticipate continued share repurchases. 

They project annual buybacks of around £300 million, close to Next’s own £314 million target for 2026.

For the 2026 fiscal year, UBS expects Next to slightly outperform its guidance, forecasting full-price sales growth of 4% compared to the company’s 3.5% estimate. 

PBT is projected to reach £1,054 million, above the guided £1,046 million. Over the next five years, UBS sees Next growing PBT at 7% annually, exceeding consensus expectations of 5%.

Despite recent stock volatility, Next remains attractively valued, according to UBS. The company currently trades at 14 times forward earnings, down from 17 times at its peak in the second half of 2024. 

This discount, UBS argues, does not fully reflect Next’s improving structural earnings drivers. The new price target of 11,700p implies a return to a valuation multiple of around 17 times earnings.

Alongside Next, UBS also named Zalando as a top pick in the general retail sector, maintaining a ’buy’ rating with a price target of €40. The analysts believe both companies offer strong long-term growth potential in a fragmented market.