The Burberry (LSE:BRBY) share price is down 70% in a year. The big question for investors though, is whether it’s going to bounce back or whether there’s something wrong with the business.
There are 21 analysts with recommendations on the stock at the moment. And while their views vary, they’re generally not all that positive.
Out of fashion
It’s a bit of a cliché to say that Burberry’s fallen out of fashion. But the fact the expression has probably been overused by just about everyone looking at the stock doesn’t make it less true.
The difficulties have been well documented. A luxury – rather than ultra-luxury – product line has left the business exposed to customers facing cost of living pressures, especially in China.
On top of this, growth via a bigger focus on accessories such as leather bags has stalled as the luxury bags sector has struggled. In tough times, affluent consumers prefer the confidence that comes with much more established names in the space, such as Louis Vuitton and Hermès.
As a result, sales have fallen 21% and earnings per share are expected to fall from £1.23 in 2022 to 17p this year. The question for investors though, is what comes next?
Analyst forecasts
Analysts are expecting Burberry’s profits to rise, but they’re not forecasting a return to 2022’s levels any time soon. Despite this, the average price target’s 20% higher than the current level.
Earnings per share are expected to come in at 41p in 2025, rising to 80p by 2027. With the share price currently at £6.64, this would imply a price-to-earnings (P/E) ratio of 8 three years from now.
If the company achieves that level of earnings recovery, investors can probably also expect a dividend. Over the last 10 years, Burberry’s distributed around half its earnings to shareholders.
That would imply a dividend returning 6% a year in 2027. If the analysts are right, investors who are prepared to be patient could find themselves rewarded in due course.
Betting on a recovery
Investors taking the view that consumer spending is set for a recovery might take the view that Burberry shares are a good opportunity to profit from this. But there are some risks to consider.
One of these is the geographic breakdown of the company’s revenues. When sales peaked in 2022, around 25% came from China, giving the business an unusually high exposure to the country.
That means investors should think about the prospects for a recovery in the world’s second largest economy. If they’re optimistic about the region, Burberry might look like an excellent investment.
On the other hand, investors who are pessimistic about China’s prospects might well think there are better opportunities elsewhere. This is the view I’m taking.
Should I buy the stock?
I think the downturn in consumer spending has created some opportunities to buy shares in companies that can benefit from a recovery. But Burberry isn’t the stock I’d choose at the moment.
Analysts clearly think the stock’s fallen a bit too far despite the firm’s recent struggles. Earnings are expected to recover over the next few years, sending the stock higher as a result.
They might be right, but the company’s exposure to China looks like an unnecessary risk to me. That’s why I think there are better opportunities elsewhere.
This post was originally published on Motley Fool
