burberry bag

This week we return to one of this column’s favourite stock market sayings: “You can have cheap stocks and good news, but not both at the same time.”

Burberry offers little by way of good news right now, after January’s second profit warning in three months, but it also comes with a one-year share price chart that goes straight from top left to bottom right. As a result, the valuation is too tempting to ignore.

Best known for its iconic checks, coats and leather goods, Burberry is being tarred with three brushes at once. First, it is listed in London and is a member of the benighted FTSE 100.

Second, it is a luxury goods stock and a leading player in an industry that is falling from favour with investors after the growth rates generated in the early stages of this decade proved difficult to maintain.

Finally, it is heavily exposed to China, whose economy is struggling and whose own stock market is now being described in some quarters as “uninvestable”.

Profit warnings often come in threes and Burberry could yet complete the hat-trick, but earnings estimates and the valuation may reflect a lot of this gloom already.

Analysts expect pre-tax income to tumble by a third in the fiscal year to March 2024 and recover only modestly in 2025 and 2026, while some are pencilling in a dividend cut for good measure.

But Burberry’s shares are trading no higher now than they did in 2011, when pre-tax income was £296m and the dividend was 20p a share, compared with the £442m and 52.2p that Burberry is expected to report for fiscal 2024.

As a result, the shares trade on barely 16 times forecast earnings and yield almost 4pc.

Granted, there may be some near-term risk here, and earnings cover for the dividend may be a little thinner than ideal, but the balance sheet has net cash before leases are considered and the company does have an excellent long-term record of profit and dividend growth.

Rivals Hermès, LVMH and Richemont trade on much higher multiples of forecast earnings, of 49, 24 and 23 times respectively, while Kering, owner of Gucci, comes on a similar rating to Burberry.



They all generate higher margins than the British company and may enjoy a more plutocratic customer base while relying less on the aspirational buyer, but the valuation discount to the wider luxury sector feels large.

That reflects just how washed out sentiment is towards Burberry and it may not take much for the company’s fortunes to feel even a little less bleak – and sometimes that is all it needs for a share price to form a base ahead of a hearty recovery once a company’s fortunes turn.

It is time to warm to Burberry. Buy.

Questor says: buy
Ticker: BRBY
Share price at close: £13.36

Update: Bellway

Housebuilding is another sector of unremitting gloom, in the form of higher interest rates, higher taxes and less government assistance. Share prices are well off their highs and the result is mergers and acquisitions activity as depressed valuations tempt buyers into action.

Granted, Barratt Developments is offering stock rather than cash for Redrow, but the valuation implied by the offer suggests Bellway, MJ Gleeson and Crest Nicholson are still cheap.

Barratt is offering 1.44 of its shares for every Redrow share and at the close on the day before the deal was struck that valued the target at £2.5bn, or 763p a share. More pertinently it implied a price tag of 1.3 times historic tangible net asset value, or book value, per share.

Crest Nicholson, Bellway and MJ Gleeson currently trade on 0.7, 1 and 1 times respectively, so there could yet be gains to come from all three, even Bellway, where we have a 40pc-plus book profit and 235p a share in dividends already in the bag.

Admittedly, Crest Nicholson will have to prove less accident prone for its rating to rise and that gaping discount to close, but house prices are holding up well, mortgage demand is ticking higher, according to the Bank of England, and there remains the prospect of interest rate cuts this year to help provide a more favourable economic outlook for the builders than has prevailed for the past two years.

Bellway and Crest Nicholson still look good value. Hold.

Questor says: hold

Tickers: BLW, CRST

Share prices at close: £28.60, 226p

Russ Mould is investment director at AJ Bell, the stockbroker

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