Why I think Burberry’s share price is simply too cheap to ignore right now

Burberry’s share price has dropped 50% in a year. Roland Head reviews the latest numbers and explains why he’s buying.

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The Burberry Group (LSE: BRBY) share price edged lower in early trade this morning after the FTSE 100 fashion firm reported a 40% fall in earnings for the year to 30 March.

CEO Jonathan Akeroyd blamed a global slowdown in luxury sales and warned that he expects the first half of the current year “to remain challenging”.

I admit this may not sound like a promising outlook for an investment. But even in these difficult conditions, Burberry still sold almost £3bn of luxury goods last year and made a £271m profit. The dividend was held unchanged at 61p and remained covered by earnings too.

Due to the sharp fall in the company’s share price over the last year – it’s down 50% — these results leave Burberry shares trading on just 15 times earnings, with a 5% dividend yield.

That’s unusually cheap for this business, and I think this sell-off has probably gone too far.

In my opinion, the stock’s current valuation doesn’t reflect the long-term value in this luxury business, which has been trading for over 165 years.

I’m betting on a luxury turnaround

I’m pretty certain that the luxury market in general is not going to go away. Throughout history, wealthy people have liked to splash their cash on expensive clothing and accessories.

What’s more, luxury brands often recover from slowdowns more quickly than mid-market brands. Wealthier customers tend to be less affected by cost-of-living problems than those on average incomes.

The main risk that worries me is that Burberry could lose its way. Mr Akeroyd’s strategy is to focus on the “Britishness” of the brand while trying to move even further upmarket.

Is this what luxury shoppers want? I can’t be sure.

If the brand positioning is wrong, Burberry could suffer several years of disappointing sales. If that happens, the shares might not be so cheap, after all.

I can’t rule out this risk. But Burberry has been in business for 168 years and has adapted to changing tastes many times before. I’m willing to trust this track record.

Cheap shares: I’m buying more

I already own shares in Burberry, but my position is currently showing a big loss. Although I don’t always average down into losing investments, in this case I think it makes sense.

I mentioned Burberry’s 5% dividend yield earlier. My research suggests that the last time Burberry shares were this cheap was the 2008/09 financial crisis. The company didn’t cut its dividend then and the business subsequently returned to growth.

I expect a similar result this time round. For a decent luxury brand with double-digit profit margins, I reckon Burberry simply looks too cheap at the moment.

I’m planning to top up my holding in the next week or so.

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.

Roland Head has positions in Burberry Group Plc. The Motley Fool UK has recommended Burberry Group 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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