Back in July, I wrote about the Burberry (LSE:BRBY) share price. I flagged at that point why I wasn’t going to be investing, as I saw several reasons why I believed the stock could head lower. Since then, it’s continued to fall, hitting fresh 52-week lows and falling out of the FTSE 100.
It’s time for me to check in again and see if this has now become a value share that makes sense to buy.
Falling further
Since the end of July, there have been some added reasons why the stock’s fallen. Four times a year, the FTSE 100 and FTSE 250 rebalance, with stocks getting demoted from the top index to the FTSE 250, and outperformers getting promoted.
Burberry dropped out of the lead index for the first time in 15 years at the end of the summer. This acts as a negative because some fund managers can only hold FTSE 100 stocks. So they would be forced to sell their holdings in the company. Further, tracker funds for the index would also sell the shares that are demoted and buy the newly promoted instead.
Although FTSE 250 tracker funds would buy Burberry shares, it’s a smaller pool in comparison to the size of FTSE 100 trackers. Therefore, the net impact’s negative on the stock.
Another factor has been fresh downgrades from investment analysts. The team at Barclays came out earlier this month and reduced the share price target from 820p to 540p. The team noted a “lack of disciplined full-price strategy” at Burberry, which could further hamper financial results. Analysts at Jefferies went even further, slashing their share price target to 490p!
Finding the value
I do think that Burberry can be referred to as a value share given the extent of the share price move. The 70% fall over the past year puts the price-to-earnings ratio at 8.16. This is below the fair value benchmark I use of 10.
However, I do need to be cautious here. The latest trading update showed it expects to post a half-year operating loss. It’s on track to record a full-year operating profit. To me this means earnings will be lower than the one recorded last year. The earnings per share figure I’m currently using for the ratio figure is based on the one from the last full-year results. Therefore, it’s fair to say the ratio will likely change over the next six months when the new profit figure gets released.
Value can also be noted when it comes down to the strategy shift. Often, I’ve seen the share price of a stock start to recover when a new CEO comes in and starts to cut costs and set a new direction. Burberry has a new CEO, Joshua Schulman, who’s a veteran of the industry. I expect sweeping changes in the coming months, which could act to support the share price.
Overall, I’m less pessimistic about the stock than I was in July. However, I’m not convinced we’re out of the woods yet, so I’m still going to sit on my hands.
The post After falling 70% and crashing out of the FTSE 100, should I buy this value share? appeared first on The Motley Fool UK.
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays Plc and 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.
