Thought I would try something different and write up an individual stock based on how it looks in the Scores to see if that appeals to anyone.
The stock I have chosen for this is perhaps a slightly contrarian opportunity as it is a seller of upmarket branded clothing and accessories, Burberry (BRBY - see fact sheet via the link highlighted name). Consequently it might seem like a strange one to investigate when there is a cost of living crisis brewing up a potential recession and problems in China due to the latest Covid related lock downs.
All of which might put a dampener on sales of their famous check gaberdine raincoats and related checked accessories. Then again those who are prepared to splash out thousands on such items probably won't be too troubled by filling up their gas guzzling Range Rovers & Bentleys, the cost of groceries going up or heating their draughty mansions or swanky Penthouses I guess.
So enough rambling lets take a walk through the financials etc:
CI Score = 65/ 100 against other UK dividend paying stocks in the Compound Income Scores universe, based on an EBIT/ Enterprise Value Yield of just under 10%. It also offers a forward dividend yield of 3.4% which is predicated on these growing at around a double digit rate - which should take care of inflation and maintain the value of that yield at least in real terms for now - so not too bad I'd say. While on the our more broadly based value score across a broader universe of some 1500+ UK stocks used in our VQM model it Scores 61/100 and 61 overall in terms of VQM, dragged down by the poor price momentum.
So overall it is offering slightly better than average value at the moment. It is also worth noting that the current prospective PE of around 15-16x is somewhat below average for the last 5 to 10 years which has usually been close to 20x or above probably reflecting the quality and growth that this one has demonstrated over the years. It is a bit lower right now given rising bond yields and the sell off in higher rated growth stocks recently & perhaps the concerns about recession etc. on retailers.
On the dividend, which has generally grown steadily over the years, apart from the recent pandemic, although they have suggested they will return to pre-covid levels going forwards. So it is yielding an above average 3.4% against the historic average of around 2.5%. On dividend safety (as measured by cover ratios) and dividend growth it also scores slightly better than average with scores of 58/100 & 68/100.
Thus if they can achieve the forecasts which those ratings are based on and get back to their average historic rating of around 20x with a 2.5% yield then this could suggest potential upside of around 25 to 35%. We can gain some reassurance on that as their recent update suggested they were confident of hitting their numbers for this year and their comments on the dividend, they have also seen earnings upgrades where they Score 84/100 and helps to support this view.
Obviously it is too early to say for the year to March 2023 given the concerns outlined at the start, so if one if cautious it might be best to wait to see what they have to say when they report full year numbers tomorrow. However, having come through a bit of a restructuring in the last couple of years and with a new CEO having just arrived it seems they are confident of making progress if their Factsheet (linked to above) is to be believed.
Operating Metrics & Financial Security or Quality
They Score well on this front with a mid teens operating margin and around a 20% ROCE over the last 5 years along with limited borrowings and an improving balance sheet. So on these metric they Score 92 & 80. While it is worth noting that they are looking to get debt to EBITDA in the range of 0.5-1.0x and they have been undertaking share buy backs too in an attempt to achieve this and as part of their capital allocation policy. On the back of this they Score 81 (100 is best) on our SHY score.
Summary & Conclusion
Based on the factors in the Scores covered above Burberry comes out in the top decile in the Compound Income Scores and was purchased for the portfolio after their update and upgrades earlier in the year. Since then it has drifted off with the market and on the back of a sell off in higher rated stocks due to rising bond yields and in this case perhaps their exposure to Chinese consumers too, given the lock downs over there as well as cost of living / recessionary worries.
On valuation grounds it would appear that there might be some upside of around 25-35% (£20 to £21) if they can deliver the currently forecast earnings and dividends and make it back towards their historic average rating. Thus it seems the market might be offering an opportunity to buy a quality branded company at a reasonable price given the current market and economic uncertainties.
On that basis it will remain in the Compound Income Scores portfolio and I think it might be a good opportunity to pick some up for the longer term on even better terms now. If you are a cautious investor then I'd suggest adding it to your watch list and wait for further updates with their final results tomorrow. For traders, looking at the graph below it looks like it could be a potential trade ahead of tomorrows figures with recent support just below 1500p which would be 100p of downside, versus potential towards around 1800p and a recent gap on the chart for a 2:1 reward to risk if that's enough for you. Longer term I've suggested it could get back to around 2000p plus which would be a more generous 4:1 reward to risk.
Of course nobody knows what the future holds and it is possible that they might be hit more than currently forecast by the economic difficulties around the world and that markets might sell off more this summer. So mind how you go and don't forget to take a (Burberry) umbrella with you in case of summer showers.
If you have enjoyed this post and would like to find other similar ideas and opportunities across the UK market, then do check out our Scores and how you can gain access to them by clicking here.