With the FTSE 100 showing strong performance year-to-date, it’s looking harder to sniff out undervalued shares than it might have been a year ago.
The index is up 8%, as I write, ahead 12% from a low in January, and the majority of its constituent companies might spend December clinking glasses in boardrooms to toast what might go down as the best year since 2009.
Burberry (LSE: BRBY), on the other hand, won’t be joining in any celebrations. The luxury fashion goods retailer has suffered a miserable year as its shares have halved in value and are down 73% from the year before. They now lie at their cheapest price for 14 years.
The obvious question is, is this a tantalising ‘buy low‘ moment? Or has the brand simply fallen out of fashion?
Catch-up
Burberry’s decline can be put down to, in part at least, a game of catch-up it played with luxury groups like LVMH (Louis Vuitton Moët Hennessy).
LVMH’s success selling expensive clothes and expensive wine hoisted it to become Europe’s number one company by market-cap and briefly made owner Bernard Arnault the richest man in the world. It can hardly be argued that those weren’t bad footsteps to follow.
The issue was that LVMH’s luxury prices were a tier or two above, and Burberry’s subsequent price hikes to bring it in line with the French competitor and other ultra-luxury labels weren’t taken too well in the middle of a wider luxury slowdown.
The 29 June update revealed global sales fell 21% and sparked a switch of CEO only two weeks later. Customers voted with their wallets and not the way management must have been hoping.
Turnaround
Bumped up price tags weren’t the only reasons for the decline. Lower consumption in China, a huge market for Burberry and luxury goods in general, made a difference too. A cool reception to the latest collections seemed to have an effect as well.
Both could easily be temporary issues. An improved Chinese economy and a killer new collection could both lead to a big turnaround here.
And this isn’t even the first time Burberry shares have dropped 70%. The 2008 crisis caused a similar fall and presented an opportunity to snap shares up at around £2. The shares rose above £20 within the decade. One more reason to look at this as buying at the low end of a cycle then.
In terms of price, Burberry will trade at 41 times earnings for 2024, very expensive indeed. But that’s only looking at a recent and possibly singular disastrous update. If the firm returns to its 2022 results then the current share price gives a 5.6 times earnings, very cheap indeed.
I will look at buying the shares the next time I have spare cash.
