FTSE 100 stocks are on the rise thanks to the slowly improving economic conditions. And B&M European Value Retail (LSE:BME) is one of many companies within the UK’s flagship index that’s on a roll.
In fact, the discount retailer has surged more than 50% in the last 12 months. And this upward momentum might be on track to continue.
Does this make it one of the best shares to buy now? Let’s take a closer look.
Bargains in the FTSE 100
Investing in a discount retailer is hardly the most exciting investment prospect. But sometimes, boring can be highly lucrative.
After managing to stay open during Covid-19 lockdowns, B&M has been on a campaign of expansion that’s long since started to bear fruit.
Looking at the preliminary results for its 2023 fiscal year ending in March, sales have continued to grow to new record highs. That’s not exactly surprising, given the cost-of-living crisis is making the group’s B&M and Heron Foods brands far more popular among consumers looking to save money.
While underlying earnings have suffered compared to a year ago, they remain significantly ahead of pre-pandemic levels. And today, pre-tax profit margins sit at a solid 8.8%, far exceeding industry titans like Tesco.
Apart from funding shareholder dividends, this cash flow generation is also fuelling the group’s expansion into France. And with international revenue growth sitting in the double digits along with a steady increase in gross profits, this FTSE 100 stock appears to be on the path to long-term success.
Pairing all this with a P/E ratio of just 16, this company continues to look relatively cheap, even after impressive share price gains over the past year.
Every business has its risks
As encouraging as the group’s progress has been of late, there remain plenty of hurdles to overcome. The discount retail market is highly competitive and the lack of pricing power over certain food products could make further margin expansion challenging.
B&M has historically made up for this through higher-priced premium items like outdoor furniture and other household products. But inaccurately accessing the level of consumer demand could result in a pileup of slow inventory.
In fact, this has already happened in the past following the pandemic. And it can make growth even more challenging in this weakening consumer spending environment.
Something else to keep an eye on is debt. International expansion isn’t cheap and the group currently has just over £2.2bn of loans and lease liabilities on its books. While the company looks more than capable of servicing these loans, the interest rate hikes by the Bank of England are creating a tangible increase in B&M’s interest bill. Needless to say, this adds additional pressure to profit margins and, in turn, dividends.
Nevertheless, management appears to be on point. The balance sheet still looks robust, and demand for low-cost shopping solutions is rising. Therefore, I believe this FTSE 100 stock is perfectly positioned to thrive in the long run. And that’s why it’s on my personal best stocks to buy list today.
