This fashion brand's valuation suggests something isn't right.
Shares in French Connection (LSE: FCCN) have fallen by 50% in the last couple of months. The big drop came on news of disappointing autumn sales, and the slide continued until last week when the shares went to a low of 36p.
This put the shares somewhere around the company's cash value; a fact that didn't go unnoticed by some of the Foolish community's savviest investors.
And it was a presentation to a group of Fools on Tuesday that prompted a superb in-depth analysis of the company's prospects in "Paulypilot's Pub -- Share Ideas" discussion board, by its eponymous founder. Paul has a very interesting investing track record.
If you have even a passing interest in French Connection's fortunes, I urge you to read it.
The implication of the recent share price action is that a profits warning may have been in the offing. But Paul's report suggests this isn't the case; had management needed to warn on profits, they would have done so by now.
Consensus forecasts are for earnings of 5.5p per share for the year just gone, rising to 6.7p this year. At the time of writing, the shares are up to 43.8p.
So the expected current P/E of 8 is cheap in itself. But when you consider the last reported net cash position of over 32p per share, net working capital of over 57p per share and the fact that most cash is generated in the last quarter, you can quickly see the value case.
Moreover, recent favourable trading announcements from Burberry (LSE: BRBY), Ted Baker (LSE: TED) and others have been reasons for a little more confidence in the sector.
But it's all about getting the offering just right in this most fickle of businesses: fashion. Brands and looks get a head of steam and earnings rocket, as witnessed by Superdry's stellar performance for its owner SuperGroup (LSE: SGP). The problem is that the complete opposite also happens.
If French Connection can get this right, most notably in Asia, then the valuation could really fly. If not, well, there's always the cash to protect us from disaster.
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More from David Holding:
> David owns shares in French Connection.
