Should you kick Burberry Group plc into touch and buy growth-focused Jimmy Choo plc?

Are today’s full-year results from luxury shoemaker Jimmy Choo plc (LON:CHOO) enough to tempt investors away from Burberry Group plc (LON:BRBY)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Shares in luxury goods manufacturer, wholesaler and retailer, Burberry (LSE: BRBY) have been on a roll since last year’s surprise EU referendum result. Dipping as low as 1,061p towards the end of June, the stock now trades at 1762p — a rise of 66%.  

While hindsight is a wonderful thing, Burberry’s relentless rise over the last eight months is yet another example of how buying solid companies when other investors are selling has the potential to make a noticeable difference to your wealth once sentiment recovers.

That said, the questions investors in the £7.5bn cap must now ask themselves is whether this kind of performance can continue and if not, are there better opportunities elsewhere? 

Time to sell?

Trading on 23 times earnings for 2017, Burberry’s shares certainly give the impression of being fully valued at the current time, particularly as earnings have been patchy over the last couple of years.

In its defence, the blue chip’s stock has rarely been on a cheap valuation and with good reason. The company has generated consistently high returns on capital over recent years and is also hugely cash-generative. Assuming it can achieve the 8% earnings per share growth pencilled-in for 2018, the price-to-earnings (P/E) ratio also reduces to 21 in 2018. That’s still expensive, albeit not ludicrously so.

Nevertheless, if you’re on the hunt for growth, one of Burberry’s peers may be more to your liking.

Walking tall

Thanks to a series of positive updates, shares in luxury shoe specialist Jimmy Choo (LSE: CHOO) now change hands for 66% more than last June’s pre-referendum low of 96p. Despite the market’s rather muted reaction, I can see further upside in 2017 based on today’s full-year results from the company.

In the 12 months to the end of December, revenue climbed 14.5% to £364m thanks to decent retail performance in the second half and sterling’s recent weakness. Adjusted EBITDA rose 15.7% to £59m, driven — according to the company — by “strong sales growth, margin improvement and lower growth in overheads“. While like-for-like sales dipped by 0.8% over 2016, operating profits rose a healthy 42.6% to £42.5m.

Building on its January update, Choo has continued to see strong progress in markets such as Asia, Europe and Japan, with its respectable retail performance in the US offset by the company’s “planned reduction” in wholesale. Its men’s division continues to grow rapidly and now accounts for 9% of revenue. Assuming this momentum can be sustained, I wouldn’t bet against Choo’s share price continuing to climb.

On the downside, stock in Choo — like that of Burberry — isn’t exactly cheap. Although earnings per share are expected to rise by 23% in the coming year, a P/E ratio of 19 doesn’t scream value. The not-insignificant amount of debt on its balance sheet and lack of dividends are also in sharp contrast to Burberry’s vast net cash position and 2.2% yield for the current year.   

Bottom line?

While higher estimated earnings growth at Jimmy Choo would imply that it’s the better buy for those investors motivated by the prospect of capital gains, Burberry’s scale and history of generating above average returns on capital may suit those whose investing style is more risk-averse.

Regardless of which appeals most, anyone considering stocks in the luxury goods sector must also be sensitive to the fact that sentiment can quickly diminish if macroeconomic or political events conspire to make markets anxious.

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.

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

More on Investing Articles

Investing Articles

Here’s how investing £250 a month could bag me over £10K in passive income annually

This Fool breaks down how she would go about building a passive income stream worth over £10,000 annually to enjoy…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

I’d snap this FTSE 250 stock up in a heartbeat for juicy returns and growth!

Sumayya Mansoor explains why this FTSE 250 property stock is firmly on her radar as she looks to buy stocks…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

1 dirt-cheap FTSE 100 stock investors should consider buying in June

The FTSE 100 is littered with bargains, according to our writer. She explains why investors should be taking a closer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

The Legal & General share price has gone nowhere. Why?

The Legal & General share price has performed much worse than the the FTSE 100 over the past five years.…

Read more »

Investing Articles

Where will the BT share price go in the next 12 months? Here’s what the experts say

The BT share price has been sliding for years. But after the latest set of results, it looks like the…

Read more »

Investing Articles

Are National Grid shares now a brilliant bargain?

National Grid shares look exceptionally cheap following last week's selloff. Is now the time to buy the FTSE 100 firm…

Read more »

Happy young female stock-picker in a cafe
Investing Articles

Up more than 15%! — this small-cap company is delivering phenomenal dividend growth

There’s more good news in this company’s interim report and it may be shaping up as a decent dividend growth…

Read more »

Electric cars charging at a charging station
Investing Articles

Big news for Tesla stock investors!

Tesla has just quietly dropped a key target it set for itself just a few years ago. What does this…

Read more »