Should I buy this dirt cheap FTSE 100 stock, 2024’s biggest faller?

When a share price has fallen as far as this FTSE 100 one, we surely have to site up and take notice. Especially if forecasts are good.

| More on:

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

B&M European Value Retail (LSE: BME) is the worst FTSE 100 share price performer so far this year. A 38% year-to-date plunge edges out Croda International, just a shade behind at 37%.

But what is it, and why do I think it could be dirt cheap right now?

It’s the operator of the B&M chains in the UK and France, with UK operations making up most of the firm’s revenue. And it owns Britain’s Heron chain too.

Why is it down?

Interim results on 14 November gave the shares a small boost. But it was short-lived, and they quickly headed down again.

That’s despite UK revenues growing by 3.7%, with adjusted EBITDA up 11.5%.

The problem is that like-for-like sales keep on falling. This second quarter of this year saw a modest decline of 1.9%, but that follows on from a bigger Q1 slump of 5.1%.

Can the company turn that around? Analysts think it can, and they have two years of solid growth on the cards once the current year is out. We might have a shaky time before then though, including a competitive festive season.

Will it go up?

With the shares down, what makes me think they could be set for a strong few years?

Those forecasts for one thing, which would drop the price-to-earnings (P/E) ratio down as low as eight for the 2026-27 year if they’re right.

They also see a 42% dividend hike by then from the 2023-24 payout. There’s a 3.7% dividend yield on the cards for this year. And the rise could take it up to 5%. I reckon that could make it a steal if the P/E stays low.

And then there’s the company’s outlook at H1 time: “We anticipate full-year Group adjusted EBITDA to be in the range of £620m-£660m (FY24 52/53 weeks: £616m/£629m).

That might just mark the start of a recovery.

Why it might not

The company — like the rest of the retail sector — describes the three months covering Christmas as the ‘Golden Quarter’ (and yes, it capitalises it).

While the cost-of-living pinch is so sharp, there’s a great attraction for B&M’s low-price sales outlets. And though we might expect very tight margins, the first half saw an adjusted EBITDA margin of a healthy 10.4%.

But as inflation overall falls (despite the upward move announced on 20 November) and the pressure on our pockets lessens, I fear that might mean the start of a shift back to more upmarket outlets. Maybe Marks and Spencer could be a better long-term pick to consider?

B&M reported a net debt to adjusted EBIDTA ratio of 1.2x, which doesn’t seem too stretching. But including leases, it rises to 2.5x. Debt can put pressure on long-term dividends cash.

Store growth

B&M increased its store count by 39 in the first half, with 34 of those in the UK. And that should help benefit from the “recent volume momentum” that CEO Alex Russo spoke of at halftime.

Despite the short-term risks, especially from competition at the cut-price end of the market, I’m considering buying B&M shares.

But I think I’ll wait and see how the Golden Quarter goes first.

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended B&M European Value and Croda International 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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Here are the dividend forecasts for 2 passive income stocks to consider this December

These passive income stocks offer some of the highest dividends on the FTSE at almost double the market average! Is…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

£5,000 of 9.2%-yielding Legal & General shares could make me £599 a month in passive income over time!

Legal and General shares remain a top passive income stock in my core portfolio holdings, with a 9.2% yield and…

Read more »

Investing Articles

With a 10.4% yield, P/E ratio of 9.9, and a P/B of 0.37, is this FTSE 100 stock a no-brainer buy for me?

Using a range of popular valuation measures, this FTSE 100 stock appears to offer tremendous value for money. So is…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Down nearly 18% from its 52-week high, is the Lloyds share price now a screaming buy for me?

In recent weeks, the Lloyds share price has under-performed the wider market. Could this be the buying opportunity that I’m…

Read more »

Investing Articles

As BAE Systems’ share price drops 14% should I buy more?

FTSE 100 defence giant BAE Systems recently reiterated strong growth guidance, leaving its share price looking significantly undervalued to me.

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

After an 18% jump on its 2024 results, is it too late for me to consider buying this FTSE 100 hidden gem?

This FTSE 100 technology firm unveiled very strong 2024 results recently and a big share buyback, but is it too…

Read more »

Investing Articles

£5,000 invested in Rolls-Royce shares in 2023 would have made this much by now

Rolls-Royce shares have been one of the best-performing UK FTSE 100 investments over the last two years. But how much…

Read more »

Young Asian woman holding a cup of takeaway coffee and folders containing paperwork, on her way into the office
Investing Articles

£5,000 invested in Lloyds shares in 2023 would be worth this much now

Lloyds shares and other banking stocks have thrived in 2024, but has it been a good investment for shareholders who…

Read more »