Yesterdays first-half trading update from Burberry caused the share price to plunge around 17%. Ouch! As I write, the shares have bounced back a bit, but is the market correct to mark Burberry down, or is this an over-reaction and therefore an opportunity to buy the shares at a better-value price?
Christopher Bailey, described by the firm as the chief creative and chief executive officer, suggests things are getting tougher in the companys trading markets. Luxury consumer goods arent flying off the shelves as fast as they used to, so Burberry has increased its focus on driving sales and productivity, and is bearing down on costs.
Thats not the double-digit growth language that we are familiar with from Burberry, so I think the tone of the update is the main driver behind the share-price fall. City analysts following the firm think earnings will ease by 2% during year to March 2016 and bounce back by 10% during year to March 2017. The top man speculates that the upcoming festive season will enable better sales in the second half of the year, but I think the reported decline in sales in the Asia Pacific is cause for caution last year around 38% of sales came from the region.
At a share price of 1300p, Burberrys forward price-to-earnings ratio (PER) still runs in excess of 15 quite rich for reduced growth expectations. I see todays mark-down in the share price as a sensible precaution, and not a reason to rush in and buy unless we planned to do so anyway.
Highly rated, but good
Ive long admired consumer goods company PZ Cussons, but the firm faces similar challenges in its markets as Burberry. Last month, Cussons told us that ongoing drags relate to weakening exchange rates, particularly in Australia, Indonesia and Nigeria where imported inflation is affecting margins as well as consumer disposable income.
As ever, Cussons remains upbeat, but growth has been lacklustre lately with earnings flat during year to May 2015 and set to rise by just 2% during the current year and 8% next year, according to City analysts following the firm.
Despite my liking of the companys cash-generating business model, the shares seem to be trending down when viewed on a five-year chart. I think thats due to valuation, coupled with concerns about the sustainability of growth.
At todays 309p share price, the forward PER runs just shy of 16, perhaps a little rich if growth is set to become harder to find. However, PZ Cussons remains a great long-term bet thanks to its consumer products, repeat-purchase business model, in my view. Such characteristics could see the firm faring better in any macro-economic downturn than luxury goods providers such as Burberry.
Fashion firm Supergroup is perhaps the most volatile proposition of the three firms featured here. I see the companys Superdry name on labels worn on the outside of clothing everywhere, but I really have no idea whether the brand is still hip, cool, in vogue or like being seen in your dads hand-me-downs.
Right now, City analysts following the firm seem upbeat about the firms immediate prospects with expectations of 12% growth in earnings for year to April 2016 and 18% for the year after that. The forward PER rating accommodates that growth though, standing at almost 18.
The share chart looks like a profile of the Swiss Alps; if you want excitement, stick with Supergroup. The big worry for me, though, would be my inability to predict a change in fashion, and fashion firms such as Supergroup depend on their product remaining fashionable in order to succeed. I think Burberrys quintessential English check pattern has more heritage and global appeal than Supergroups offering, which suggests the possibility of more resilient longevity.
However, of the three firms featured, I’d be more likely to stick with PZ Cussons for the long haul. Cussons enjoys many characteristics similar to five superior large-cap firms, each of which has a healthy balance sheet, a dominant market position, reliable cash flows, wide exposure to global markets and decent growth prospects.
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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of PZ Cussons. The Motley Fool UK has recommended Burberry. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.