A beaten-down UK share in bargain territory

Although many UK shares have thrived in the high inflation environment, many have sunk. This FTSE 100 company now looks too cheap.

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UK shares have had a very mixed start to 2022. Indeed, whereas the FTSE 100 has stayed broadly flat in the first five months of the year, the FTSE 250 has sunk around 16%. And over the past year, the FTSE 100 has risen 7%, with the FTSE 250 falling by around 10%. The FTSE 100’s outperformance has mainly been due to the abundance of oil and mining stocks within the index, companies that have thrived due to high rates of inflation. But I’m avoiding these oil and mining stocks in favour of beaten-down UK shares, which I feel have the potential to recover strongly during the rest of the year. Burberry (LSE: BRBY) is one of my personal favourites right now. 

Recent trading update 

Despite the continuing global pressures, Burberry demonstrated strong signs of growth in its FY2022 results today. For example, revenue was able to rise over 20% year-on-year to £2.8bn and adjusted operating profits rose over 30% to £523m. These operating profits were ahead of guidance, supported by strong operating profit margins.  

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These strong results have also correlated with healthy shareholder returns. For instance, a dividend per share of 47p for the year represents a year-on-year rise of 11%. It also equates to a yield of around 3%, which is far higher than previously. The company has also introduced a share buyback programme of £400m over the next year. This is a sign that management believes the share price is overly cheap. It should also help boost metrics such as earnings per share, a factor that may see the Burberry share price rise. 

Outlook

There are several macroeconomic uncertainties facing Burberry. For example, the current high number of Covid cases in China and the severe lockdown in Shanghai have had negative impacts on consumer spending. This has led to economic consequences. As China is one of the company’s biggest markets, this is a severe worry. However, I believe that this is also a short-term worry, especially as the Shanghai lockdown is forecast to end at the start of June. 

However, although inflation is a factor affecting many UK shares, Burberry seems well-equipped to deal with it. This is because the company’s customers are mainly the wealthy, who are less affected by inflation. 

Therefore, Burberry has continued its guidance for high single-digit revenue growth and margin acceleration at constant exchange rates in the medium term. This is a sign that the firm is dealing with the macroeconomic headwinds well. 

Why is this UK share a bargain?

Due to various worries, the Burberry share price has been beaten down over the past year, falling nearly 30%. As such, it has drastically underperformed the FTSE 100. But it now has a price-to-earnings ratio of well under 20 and a price-to-sales ratio of just over 2. Due to the long-term positive outlook for luxury fashion, this seems a very low valuation. Compared to rivals, such as LVMH, it also seems considerably cheap. Therefore, I may add this UK share to my portfolio. 

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Stuart Blair 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.

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 considered, so you should consider taking independent financial advice.

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