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Prada Shares Attractive Despite Post-IPO Rally: Pros

Luxury retailer Prada’s shares have rallied 17 percent since the company’s initial public offering (IPO) in Hong Kong just over a month ago, outperforming the Hang Seng Index. The stock now trades at a valuation of about 26.5 times current earnings, a significant premium over the industry average of 20 times earnings.

The Prada store in Milan, Italy.
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The Prada store in Milan, Italy.

But some analysts say the stock is still attractive.

"Whether it's expensive or not depends on how you look at it," says Francis Lun, managing director of Lyncean Holdings. "If you buy its Asia growth story, then it's not expensive at all. Just look at how many people are lining up outside the stores."

Prada plans to open more than double its stores in China to almost 50 by early 2014. Demand from China’s affluent helped the company raise profits by 150 percent last year to $363 million, and the Prada predicts profits could reach $214 million in the first half of this year alone.

Earlier this month, Prada exercised its over allotment option and boosted the amount it raised from its Hong Kong listing to $2.46 billion.

"Prada is expensive, but people are willing to pay a premium for it. Just like its bags," says Alvin Cheung, associate director of Prudential Brokerage.

But Cheung says he would prefer another recent IPO, that of Milan Station, if he had to choose one stock to buy. "Europe's economy is unstable with multiple debt crises. As Prada's home market, it could be a drag on the company's performance," says Cheung.

On the other hand, Milan Station is a homegrown brand, whose business is powered by wealthy locals in Hong Kong. The company sells second-hand handbags like Chanel and Hermes, and its shares have shot up over 31 percent since their debut.

The retailer is also planning to open 24 stores on the mainland in the coming two years.