The FTSE 100 may be breaking new highs but one popular growth stock has defied the trend by slumping to a 52-week low. That may tempt investors who prefer to buy out-of-favour bargains than chase momentum stocks upwards.
Primark owner Associated British Foods (LSE: ABF) has fallen out of fashion with investors. Its shares are down almost 15% over the last year and 30% over five years. So is this now a brilliant bargain or an unsightly value trap?
The gloom deepened with ABFâs latest trading update on 23 January. Warmer autumn weather and cautious consumers dented Primark’s UK revenues in the 16 weeks to January 4.
ABF’s short on style
Sales in the UK and Ireland fell 4% during the period, or 6.4% on a like-for-like basis. That’s a blow because they make up 45% of Primark’s total. The group’s expanding in a string of other markets though, including Spain, Portugal, France, Italy and the US. In total, it operates across 56 countries.
Yet the board still cut fiscal 2025 sales growth targets to low-single digits. On the plus side, gross margins widened, while stringent cost management offset inflation.
Unfortunately, inflation isnât going anywhere. The Bank of England (BoE) predicts it will hit 3.7% this summer. Even value retailers can’t escape the squeeze. Nor can ABFâs food businesses, hit by rising costs.
Thereâs a glimmer of hope though, with ABF shares edging up 3.5% over the past week. The BoEâs rate cut on 6 February lifted investor sentiment, as lower interest rates could support consumer spending. But one weekâs movement isnât a trend. Itâs barely even a blip.
Associated British Foods’ balance sheet remains strong. Net debt (including lease liabilities of £2bn is partly offset by £1bn of net cash. An 18.1% return on capital employed is solid. The group made a £1.9bn profit last year.
As said, Primark continues expanding internationally, with US growth looking promising. However, trade tariffs could be a concern if Donald Trump targets the UK.
The 16 analysts offering one-year share price forecasts for ABF have a median target of just over 2,252p. If correct, thatâs an 18% rise from today. Weâll see. Forecasts range dramatically, from 1,730p to 3,120p. The recovery isnât guaranteed.
Of 19 analysts covering the stock, 10 rate it a Hold, while the rest are split between Buy and Sell.
Itâs a value play with risks
ABF looks like superb value today. Its price-to-earnings (P/E) ratio has plunged to just 9.7. Thatâs cheap for a solid business like this one, well below the FTSE 100 average P/E of around 15 times.
If consumer confidence rebounds and Primark expands, investors who take a chance on the stock could reap the rewards. However, there’s a chance conditions worsen or margins stay under pressure. If so, investors will just have to wait until the cycle swings back in its favour.
I like recovery stocks, but experience has taught me turnarounds can be slow.
The government’s upcoming Budget hike to employersâ National Insurance contributions wonât help. Nor will the 6.7% rise in the UK Minimum Wage. Worse, the lowly 2.2% trailing yield wonât reward investors while they wait.
I think investors should be cautious before considering this one today.
The post At a 52-week low, is this ‘forgotten’ FTSE growth share now in deep value territory? appeared first on The Motley Fool UK.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods 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.
