Could this beaten-down FTSE 100 stock be a takeover target?

Luxury stocks tend to trade at a premium, but this FTSE 100 brand isn’t looking too strong. Could we see the company taken over any time soon?

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FTSE 100 stock Burberry (LSE:BRBY) has been in the wars over the past 12 months. In fact, the stock’s lost more than half of its value over the period, after highlighting that sales were falling alongside rising concerns over the general trajectory of the business.

However, I recently bought stock in the firm. So why would I do that? Well, I’m waiting on a recovery, and it sounds like the brand could be doing a lot better than it is. I’m also aware that at 14.4 times forward income and with a market-cap of £4.5bn, Burberry could be a takeover target.

Falling apart at the seams

Burberry’s growth has been impressive in recent years, but we appear to have reached a turning point. Luxury brands in the clothing and accessories space have highlighted slowing demand and this is no different for Burberry. Retail revenues were down 7% in the third quarter ended 31 December, at £706m, and earnings for the year to 31 March are expected to fall by at least 27% year on year.

There are also questions as to whether creative director Daniel Lee is taking the brand in the right direction. He was very successful at Bottega Veneta, but things haven’t been going well at Burberry. Some commentators have suggested that Lee’s collections have been somewhat underwhelming to date.

There’s clearly room for the business to improve. Just look at Rolls-Royce. It went from a “burning platform” to one with strong margins to become the darling of the stock market in just 18 months.

Undervalued

Burberry might not be doing too well right now, but there’s definitely evidence to suggest the stock has fallen too far. The British luxury clothing giant is currently trading at 14.4 times forward earnings, which is broadly in line with the FTSE 100 average, but cheaper than many of its peers.

Luxury goods manufacturers tend to trade with high multiples. This isn’t just the case with fashion. Take a look at Ferrari at 55 times earnings. One reason for this is brand value, which contributes to an economic moat, and can mean strong margins — Ferrari has extraordinary margins.

Circling back to fashion, we can see that Kering — which owns Gucci, Saint Laurent, Creed and Alexander McQueen — is currently trading around 18.8 times forward earnings, having recently warned about falling sales.

Meanwhile, sector leader LVMH, which admittedly is more diversified, even moving into the luxury hotel sector, trades at 25.2 times forward earnings. In short, Burberry’s possibly undervalued compared to its peers.

Takeover on the cards?

There’s no evidence that Burberry’s a takeover target, but that’s not to say it couldn’t be. The company’s clearly trading at a discount to its peers, and it’s something of a rarity — a British luxury fashion brand with global reach. And there’s a precedent for takeovers in the current climate with Tapestry‘s takeover of Capri last year.

I wouldn’t bet on a takeover bid, but Burberry could see some interest, especially from its much bigger peers. I wouldn’t buy more stock just for a takeover but, hopefully, better things are coming for the luxury fashion house.

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.

James Fox has positions in Burberry Group Plc and Rolls-Royce Plc. The Motley Fool UK has recommended Burberry Group Plc and Rolls-Royce 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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