Should I buy today’s big FTSE 100 faller for my Stocks and Shares ISA?

G A Chester weighs up the valuation and prospects of a FTSE 100 (INDEXFTSE:UKX) stock that’s fallen heavily after its results today.

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The Burberry (LSE: BRBY) share price has shed as much as 6%, as I’m writing, making it the biggest faller on the FTSE 100 board today.

I’ve always been an admirer of the London-headquartered fashion house for the strength, longevity and global appeal of its brand. “Quintessential British style” it’s been called, built on values like “classic,” “elegance” and “heritage.”

Does today’s drop in the share price represent a great opportunity for me to buy a stake in the business?

Repositioning

The company released its annual results this morning, with chief executive Marco Gobbetti hailing “excellent progress in the first year of our plan to transform Burberry, while at the same time delivering financial performance in line with expectations.”

The transformation plan is to reposition Burberry as a super-luxury brand, to which end it brought in former Givenchy designer Riccardo Tisci as its chief creative officer. His debut runway collection was only released to stores in February, so had little impact on today’s numbers for the group’s financial year ended 30 March.

Revenue of £2.72bn was 1% down on the prior year at constant exchange rates (CER), with adjusted operating profit flat on the same basis. However, adjusted earnings per share (EPS) increased 7% at CER to 82.7p, thanks to a lower tax rate and lower number of shares in issue. The board lifted the dividend by 3% to 42.5p.

The performance was creditable, and largely as expected, for a year the company described as “the apex of our creative transition.” However, judged by the share price action, some in the market appear to have been greedy for more, either in the results or the outlook.

As it was, management reiterated previous guidance for fiscal 2020 of broadly stable revenue and operating margin at CER. It also announced a £150m share buyback programme, and said it anticipates a further 1% reduction in the group’s tax rate for the year.

Valuation conundrum

Having rated Burberry a ‘buy’ for many years, I switched to rating it a ‘sell’ in autumn 2017, as the shares hit a new all-time high of over 1,900p. I noted: “You can either keep raising your valuation threshold as the market rates the stock more highly … or stick to your valuation discipline and sell.”

My view had always been that Burberry offered great value on a 12-month forward price-to-earnings (P/E) ratio in the teens. However, by autumn 2017, the P/E had risen to over 22, which I felt was simply too expensive. Hence, much as I liked the business, valuation discipline led me to rate it a ‘sell’.

Where are we today? Well, I’ve pencilled in forward 12-month EPS of around 85.5p, which gives a P/E of 21 at a share price close to 1,800p. This is above my previous valuation threshold of ‘buy’ at a P/E of under 20, but below my rating of ‘sell’ at a P/E of over 22.

This is a bit of a conundrum, which is compounded because I think Burberry’s move up to super-luxury merits — and can support — a somewhat higher P/E than previously. I don’t see the stock as outstanding value today, but rate it a ‘buy’ on a long-term view.

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.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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