Burberry (LSE:BRBY) is a beaten-down FTSE 100 company operating in the world of high fashion. It’s among the worst performers on the index over the past 12 months, shedding more than half its value. So, what makes me think it could be a takeover target?
Prime takeover criteria
Burberry boasts formidable brand value. Its enduring legacy ensures it won’t vanish overnight; after all, you can’t replicate history.
Burberry has openly acknowledged the importance of its heritage products, which include the trench coat and scarves. And this means it’s got staying power. Collections might disappoint, but the heritage products are ever-present.
That’s particularly important in fashion. New brands might pop up all the time but there’s a huge failure rate. You can’t buy brand loyalty, but you can buy a brand with brand loyalty.
It’s also the largest name in British high fashion, and possibly the only household name. That makes it unique.
Not on trend
Burberry’s business hasn’t kicked forward since creative director Daniel Lee joined from Bottega Veneta. Lee achieved great things with the Italian brand — notably a 25.1% increase in revenue during his last year — but the same success hasn’t been forthcoming at Burberry.
CEO Jonathan Akeroyd had outlined his long-term ambitions to build a modern British luxury brand with sales of £5bn. However, it’s proving something of an uphill battle in the current market.
On one hand, I’ve heard anecdotal evidence that Burberry isn’t running as efficiently as it could. On the other hand, it’s a challenging market for a company to revamp itself and go after some fairly chunky long-term targets.
Burberry isn’t the only brand suffering. Other industry players including Gucci-owner Kering have highlighted that demand for luxury goods isn’t as robust as it was, and investor sentiment has responded accordingly.
However, it’s worth noting that industry leader LVMH has still performed in this reportedly challenging market. LVMH posted a 10% rise in fourth-quarter sales on strong demand for leather goods.
Trading in takeover range
Stocks that look cheap are often in prime position to be taken over. And it’s certainly the case that Burberry isn’t as expensive as its peers at this moment. Of course, there’s a reason for this. Investors aren’t expecting much from Burberry’s full-year results. It previously guided that profits for the year will likely fall by 27%.
Burberry is currently trading at 14.8 times forward earnings and 15.8 times forward earnings for 2025. It’s not expensive, especially compared to its peers, but it’s not growing either.
LVMH trades at 24.4 times forward earnings and 20.3 times earnings for 2025. Kering, meanwhile, trades at 18.7 times forward earnings and 16 times earnings for 2025.
Finally, Burberry’s market cap is now just £4.3bn. That means a takeover from Kering is probably achievable, but it’s just a drop in the ocean for LVMH and Hermès.
However, I wouldn’t buy a stock because someone else might come and pay more for it in the future. I do have limited exposure to Burberry, but I’m banking on a long-term turnaround.
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James Fox has positions in Burberry Group Plc. The Motley Fool UK has recommended Burberry Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
