This new UK share looks set to stride into the FTSE 100. Time to buy?

The FTSE 100 (INDEXFTSE:UKX) reshuffle is fast-approaching and this new stock could already be in line for a promotion. Paul Summers kicks the tyres.

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Business development to success and FTSE 100 250 350 growth concept.

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Iconic boot brand Dr Martens (LSE: DOCS) has made a brilliant start to its time as a listed company. The shares are already up nearly 40% from their initial offer price of 370p, leaving the footwear firm with a market-cap approaching £5bn.

Not only is this a great return for early holders, it also increases the odds of the company striding into the FTSE 100 when the next reshuffle occurs in March.

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Given this, should I be rushing to buy the stock? I’m not so sure.

FTSE 100 bound?

Now, don’t get me wrong. There are lots of things to like about Dr Martens as a company. First and foremost, it makes a lot of money, shifting more than 11 million pairs of shoes annually.

In the last financial year to 31 March 2020, the business made £672m in revenues. Whether consumers appreciate DM styling or not, it seems many shoppers are attracted to the quality and durability of its shoes. 

Dr Martens is also nicely geographically diversified. Nearly half of sales come from Europe, the Middle East and Africa and a little over a third from the Americas. The remaining revenue is generated from the Asia-Pacific region. This kind of earnings spread isn’t a guarantee of continuing success, of course. However, it should make the company more resilient compared to one that operates solely in one part of the world.

The potential for Dr Martens to enter the FTSE 100 should do its share price no harm either. Those funds specialising in tracking the top tier of the market will then be required to buy the stock. This may temporarily boost the company’s valuation even higher. 

Even so, I’ve a few nagging concerns.

Reasons to be bearish

The first of these relates to the competition Dr Martens faces. While the brand is clearly valuable and long-lasting, it’s just one among many. Moreover, its popularity has waxed and waned over the years. Anecdotally, I last bought a pair of boots several years ago and haven’t ever felt the need to ‘upgrade’. As a potential investor, this lack of repeat business would concern me. 

I’m also put off by the fact that — variations aside — it remains a ‘one product’ company. By contrast, fast-fashion giant Boohoo now has multiple brands under its belt, no stores to maintain, and is preparing to enter new markets such as beauty and sports. Despite these attractions, Boohoo currently has a lower market capitalisation than Dr Martens! 

I also don’t think it would be right to buy a company’s stock solely on its potential to enter the FTSE 100. Truth be told, this promotion might not even happen. At the time of writing, Dr Martens faces stiff competition from the likes of holiday firm TUI, Royal Mail and engineer firm Weir Group for a spot in the top tier. Even if it were to emerge victorious, the huge rise seen in the share price since coming to market may bring forth a bout of profit-taking.

Walk on by

Dr Martens has had a storming start to its time as a listed company. Notwithstanding this, a lot of promise and good news already looks firmly priced in. As someone who’s wary of frothy-looking valuations and IPO fever in 2021, I’m content to walk on by for now. 

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Paul Summers owns shares in boohoo group. The Motley Fool UK has recommended boohoo group and Weir. 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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