This FTSE 100 stock looks dirt cheap

This year has been a challenging one for firms on the FTSE 100. One stock, though, looks like it might be a great value buy right now, despite a high P/E.

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In a disappointing year for the FTSE 100, I’m happy to see some British firms that seem to be bucking the trend. One of them, Associated British Foods (LSE: ABF), is among the biggest risers in 2023, yet the stock still looks dirt cheap at today’s price.

The shares here are down 44% from previous highs. Today, I can buy into ABF for 2,0006p, whereas in 2016, the shares were going for as high as 3,516p. Whenever I see a fall that large, I’m always looking to see if there’s good value at the cheaper price. So, am I buying?

Two companies in one?

First, let’s address that 44% drop. Because the reason it fell so much is split into two parts, for the two sides of the company. 

Actually, as far as businesses go, this is an odd one. On the one hand, we have clothing retailer Primark, which makes up around 40% of revenues. The other 60% comes from its Food division, which produces raw ingredients like sugar, but also popular brands like Kingsmill and Twinings.

In Primark’s case, it suffered due to the pandemic. Non-essential retail stores like clothing were among the worst hit by the virus, and the budget clothes store took a huge beating as it didn’t – and doesn’t – have an online store. 

On the Food side, the issues were in the supply chain. These problems stemmed from the war in Ukraine, and one knock-on effect was British Sugar couldn’t make its deliveries of, well, sugar. 

The good news is that both of these issues are temporary setbacks, rather than persistent issues. The pandemic is over, and Primark revenues are up 17% year on year. And Food revenues are getting back to normal too, with sugar up 51%.

It’s all ticks here, as far as I’m concerned. With the shares at nearly half price, I’m tempted to buy in. But before I rush to any decision, let’s take a look at the firm’s prospects.

Geared for growth

Looking ahead, the first thing I note is that ABF trades at 21 times earnings. This is some way higher than the FTSE 100 average, which means that I’d need to see some growth from the company to justify the price. 

The best hope for this is with Primark. The store has become hugely popular in the UK for its value clothing lines, and it seems that success is being carried overseas.

Now, over 50% of its operations are abroad, and it opened stores in Spain, Italy, the US and Slovakia just in the last quarter alone. More stores are on the way too. Put simply, this is a growing business. 

Could the cost-of-living crisis be a problem? Well, it hasn’t shown up so far on the financials. Equally, Primarks’ budget positioning could even help it build market share if more people start buying cheaper clothes.

Am I buying?

In all, I do think the stock looks undervalued. However, I can’t escape thinking that I’d like to invest in the Primark section of the business alone, and I doubt I’m the first to have thought something like that. 

Still, I think this looks like a good buy. I’d pick up some shares at this price if I had spare cash.

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 recommended Associated British Foods Plc. 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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