A value stock is one that’s currently trading below its long-term worth. But just because a stock’s share price has fallen significantly, it doesn’t necessarily mean it meets this definition.
Take Dr Martens (LSE:DOCS) as an example. When it floated in January 2021, its shares were offered to investors at 370p, valuing the company at £3.7bn. The offer was over-subscribed and they soon climbed to over 500p.
Today (11 November), I could buy one for 57.5p. An unfortunate combination of falling sales, supply chain inflation, and logistical problems at its Los Angeles distribution centre, means the bootmaker’s market cap is now just over £550m.
Its accounts for the year ended 31 March 2021 (FY21) reported adjusted earnings per share (EPS) of 11.6p. On IPO, its shares were therefore trading on a forward earnings multiple of 31.9.
For FY25, analysts are expecting EPS of 2.9p. If the company was able to attract the same valuation as it did on making its stock market debut, its shares would currently be worth 92.5p, suggesting a potential upside of 61%.
But for a footwear manufacturer, a price-to-earnings ratio of over 30 seems expensive to me.
I suspect investors got caught up in the excitement of the IPO.
And five profits warnings later, they probably realise they over-paid for their shares. That might be why, in September, a consortium of unnamed investors sold 70m shares (approximately 7% of the company) for 57.85p — a 9.8% discount to the prevailing market price.
Looking to the future
But if Dr Martens can sort its problems, I think it could be something of a bargain.
In FY27, analysts are forecasting EPS of 7.7p. If this estimate proves to be correct, the stock’s P/E ratio drops to a very attractive 7.5.
However, I’ve my doubts as to whether it can overcome its present difficulties. After a series of price hikes, its boots, shoes, and sandals have become very expensive and vulnerable to being substituted for cheaper alternatives. And because they’re not cheap — coupled with their reputation for durability — people are unlikely to buy multiple pairs.
I think Kenny Wilson, the company’s chief executive, unintentionally highlighted the problem when he was asked to describe his favourite pair of Docs. He replied: “My 20-year-old pair of 1460 black smooth made in England”.
But I remain a fan of the business. It’s been around since 1960 and its brand — until recently — has proven to be timeless.
The company’s working on cutting costs, reducing inventories, targeting those that have never bought before, improving margins by reducing its reliance on distributors and making it easier to buy online. We’ll know whether these actions are proving to be successful when the company releases its half-year results at the end of November.
But I think Dr Martens’ biggest problem could be Donald Trump.
During the election campaign, the President Elect vowed to put tariffs of up to 60% on Chinese imports into America. It’s estimated that 98% of the company’s production has been outsourced to Asia, including China.
And If Trump carries out his threat, I fear Dr Martens sales in the US — which accounted for 37% of revenue in FY24 — would collapse.
For this reason alone, I don’t want to invest.
This post was originally published on Motley Fool
