Could I double my money with Dr Martens shares?

A battered stock price yet increasing revenues make Dr Martens shares an intriguing proposition. If I opened a position, do I think I’d double my money?

| 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.

Woman sneaker shoe and Arrow on street with copy space background

Image source: Getty Images

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.

Iconic British boot manufacturer Dr Martens (LSE: DOCS) saw its shares fall 30% after its trading statement earlier in the year. The stock has now fallen a startling 70% since its 2021 IPO. 

If I believed this world-famous brand was undervalued, it wouldn’t take too much of a recovery to double my money were I to buy its shares. And the financials show more than a touch of promise.

Impressive growth rates and a cheap valuation

Earlier this year, Dr Martens announced that predicted revenue growth for the year would be downgraded to 11-13%. Both operational issues at a US distribution centre and “unseasonably warm weather” that caused fewer people to buy boots were the reasons. This is what drove that 30% drop in the share price, but these are temporary problems. 

An 11-13% revenue rise is still good, and growth rates have been in double digits for years. Revenue increased from £348.6m in 2018 to £908.3m in 2022, margins are over 60%, and free cash flow has risen from £29.6m to £159.4m over the same period. 

At its battered share price, Dr Martens trades at less than nine times earnings. That seems very cheap for a stock with this level of historic growth and expectations of good future sales rises. By comparison, the FTSE 250 10-year price-to-earnings average is hovering around 20. Throw in a 2% dividend yield and the stock seems like a bargain to me. 

However, this might be one of those times where a few big numbers could mean I miss the wood for the trees. Here’s what I mean.

Not a pretty picture

The story of Dr Martens is that it was family-owned until 2013 when it was acquired for around £300m by private equity firm Permira. This is already not a good sign, as these firms have a poor reputation of squeezing short-term value out of companies with overzealous cost-cutting measures.

A little research into what customers think doesn’t paint a pretty picture with a relatively low Trustpilot rating. The quality of the boots is being criticised, despite the premium prices, and this includes the Made in England line as well as the majority of its footwear that’s now produced overseas.

It’s clear that significant cost-cutting has happened.  

Permira took Dr Martens public in 2021 for an implied value of £3.7bn, although the market cap now stands at £1.5bn. So while revenues are up, the market cap has increased a lot already too. Also, it seems like much of the 70% drop in share price comes because it was initially overpriced at IPO.  All of which suggests to me this is not a complete bargain.

While the financials and growth do look very good, I’m concerned about the long-term impact of the drive to squeeze out more profitability on the products themselves. As it is, I’ll be looking elsewhere for stocks that might have a good chance to double my money.

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.

John Fieldsend has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

More on Investing Articles

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

3 dividend shares I’ve bought for the next decade!

I think these UK dividend shares can amplify my long-term passive income, and could even be on track to becoming…

Read more »

Investing Articles

If I’d put £5,000 in Scottish Mortgage shares at the start of 2024, here’s what I’d have now

Scottish Mortgage shares have staged a recovery lately, powered by the public and private growth stocks held in the portfolio.

Read more »

Happy couple showing relief at news
Investing Articles

9.9% dividend yield! Is this FTSE 100 stock a brilliant bargain?

This leading British enterprise looks like a delicious deal for passive income, trading at a low multiple while offering a…

Read more »

Investing Articles

If I’d put £5k in a FTSE 100 tracker fund 5 years ago, here’s what I’d have now

Investing in a FTSE 100 index fund is a terrific way to start building wealth passively with minimum effort. But…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

What’s going on with the Scottish Mortgage share price now?

The Scottish Mortgage share price is up 30% over the past 12 months, outperforming the index. Our writer explains why…

Read more »

Passive income text with pin graph chart on business table
Investing Articles

Here’s how investing £10 a day could create passive income of £27,573 a year!

Charlie Carman explains how he'd build a sizeable passive income portfolio over time by investing a tenner a day in…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

If I’d invested £10k in Greggs shares two years ago here’s what I’d have today

Harvey Jones wishes he'd bought Greggs shares two years ago and wonders whether the FTSE 250 stock still offers the…

Read more »

Young Caucasian woman with pink her studying from her laptop screen
Investing Articles

How I’d aim to turn an empty ISA into a £1m portfolio by targeting cheap shares

Harvey Jones is trawling the FTSE 100 for cheap shares to add to his Stocks and Shares ISA, in the…

Read more »