Value Traps And A Bargain Buy For 2016: Sports Direct International Plc, Marks and Spencer Group Plc And Burberry Group Plc

One value play and two value traps among Sports Direct International Plc (LON:SPD), Marks and Spencer Group Plc (LON:MKS), and Burberry Group Plc (LON:BRBY). Which is which?

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The sheen has gone from Sports Direct International Plc (LSE:SPD) over the past two years with shares now trading where they were in 2013. The growth that was baked into past valuations has petered out with revenue flat year-on-year. While the company has continued to increase margins and profits, which were up 4% for the past half year, investors have sold off to the tune of 23% over the past 12 months. So for a solidly profitable company with growing international aspirations, the current P/E ratio of 13 may appear very attractive, right? Maybe not.

Should I buy?

I believe long-term investors should steer well clear of the company due to its numerous corporate governance issues. The CEO has recently been slapped with criminal charges over the administration process of the USC chain. And the 26-year-old boyfriend of the founder and majority owner’s daughter was recently hired to a nebulously compensated position. With red flags such as these, I don’t believe investors would profit from Sports Direct in the long term.

Opposites attract?

Perhaps the polar opposite of Sports Direct in the minds of shoppers is venerable high-street retailer Marks and Spencer Group Plc (LSE:MKS). Its shares are beginning to appear attractive to many investors after a down 2015 left shares trading at 17 times earnings with a full 4% dividend yield. Marks and Sparks bulls are salivating at expected margin and profit growth for the next year and international prospects, alongside the solid dividend and continued share buyback programme. 

Despite these rosy expectations, I remain unconvinced that M&S is an attractive buy for investors who are looking decades into the future. While the company has done an admirable job of expanding in foods, which now account for 52% of sales, overall revenue has remained largely flat for five years running.

I don’t believe international expansion will be the catalyst for returning the company to high growth either. In its most recent report, international sales were down year-on-year, despite a net gain of nine stores, and they remain much less profitable than their UK counterparts. Pair this with the continued rise of fast fashion, online purchases and changing demographics and I view Marks and Spencer as one share to stay away from.

China syndrome

While Sports Direct and Marks and Spencer remain largely wedded to the domestic market, Burberry Group Plc (LSE:BRBY) shares first soared and have now returned to Earth due to exposure to China. Shares are off nearly 30% for the year on collapsing luxury spending in the Asia Pacific Region, which accounts for one-third of sales.

Despite the bad news coming out of China, most recent year-on-year revenues remained flat while pre-tax profits rose 9%. With higher margins on Chinese sales, the luxury retailer retains significant room to further increase margins by slowing store openings and cutting staff. While the Chinese economy’s growth has slowed, investors would be wise to look past the current panic and realise that 6.5% annual GDP growth bodes well for the Chinese luxury market decades from now.

As a long-term investment, I believe Burberry’s significant pricing power, diversification and luxury profile make it an appealing addition to watch lists, particularly as the shares may have further to fall in the short term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Burberry and Sports Direct International. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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