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Is the Associated British Foods share price too cheap to ignore?

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The FTSE 100 index is down by 20% year-to-date. The Associated British Foods (LSE: ABF) share price follows a similar trajectory, with the price slumping by roughly 24% year-to-date. Unsurprising, as the economy is still reeling from the devastating effects of the coronavirus crisis.

Like other FTSE 100 businesses, Associated British Foods has been hit hard by various lockdown measures implemented around the world.

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Revenue in Q3 fell by 39% compared to the same period last year. Although the Grocery, Sugar and Ingredients divisions reported positive results, the closure of all the group’s Primark clothing stores led to a loss of roughly £650m in monthly sales.

However, as lockdown measures are eased, could now be the time to buy the ABF shares?

Falling ABF share price

The group’s falling share price means it’s trading at a price-to-earnings ratio of just 14. On the face of it, the shares do appear cheap. But just because something’s cheap doesn’t mean it’s worth buying.

With Primark stores reopening, Associated British Foods shareholders will be relieved. According to its 2 July update, trading in the “reopened stores has in aggregate been reassuring and encouraging.” Stores in retail parks are doing well. However, units in big cities are struggling, due to the absence of tourists and lower commuter footfall.

Unsurprisingly, in the seven weeks following the reopening of some stores on 4 May, sales were 12% lower than last year, on a like-for-like basis. However, sales in the week ending 20 June, with the majority of selling space reopened, trading in England and Ireland were ahead of the same week last year.

As fellow-Fool Harvey Jones points out, Primark was hurt by the lockdown more than some of its competitors, due to a lack of an online offering.

Now that stores have reopened, will its strong sales form be maintained? I think so. I believe the low prices of many of Primark’s products will mean prudent customers watching their pennies won’t be deterred from shopping there.

The fly in the ointment could be government-imposed social distancing measures. This will surely continue to limit how many eager customers can shop in its stores as confidence returns. We’ll have to wait and see how Primark — and the ABF share price — is affected by these measures.

Is now the time to buy?

Potential ABF shareholders are likely to focus on Primark’s business. Indeed, much of group revenue does stem from the retail chain. However, the company also has other divisions performing well. For example, its Grocery division reported Q3 revenues were 9% ahead of last year. An increased home-consumption helped sales of some of its brands such as Jordans, Dorset Cereals, Silver Spoon and Ryvita.

Although I think the shares look cheap, I remain cautious about its Primark brand. Sales might be strong, but it’s yet to be seen whether social distancing measures will affect footfall levels. That said, for a long-term investor, this could be a great opportunity to buy the ABF shares while the price looks low.

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T Sligo has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods. 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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