Will Burberry Continue to Make Gains?

After peaking at £19 last February, Burberry fell to just £10.70 a share by May this year, recovering to £12 today. What caused the crisis - and will the rally continue?

Emma Wall 20 July, 2016 | 4:23PM

 

 

Emma Wall: Hello and welcome to the Morningstar Series "Ask The Expert". I'm Emma Wall and I'm joined today by Morningstar Equity Analyst, Paul Swinand.

Paul Swinand: Hello, thanks for having me.

Wall: Hi Paul. So we are here today to talk about Burberry (BRBY), which is a stock close to my heart because I have it in my pension portfolio. However, it hasn’t performed very well, because I bought it at the wrong price, I bought around February last year at its peak of £19 a share, by May this year it was down to £10.70. What happened?

Swinand: Well don’t forget all of luxury has been taking a little bit of a hit. Part of the thing is that luxury in general had strong growth in China and emerging markets. Now that growth has slowed, they are not opening as many stores.

And then the same store sales have been flat to negative as well. Now I would say Burberry though we do rate it a wide moat, because it's one of those brands that’s been around for over 100 years. We think in the long run they make very good returns on capital the company will not only survive, but eventually prosper again.

Wall: On this moat this is one of the things that we look for when we are looking for a stock that we think will return an equity to investors over the long term at Morningstar. What is the source of Burberry's moat specifically then?

Swinand: Well all of luxury stocks have a strong brand source of moat and that’s because again their reputations, their knowhow, all the things that they have built equal what the brand stands for, have been built up over literally hundreds of years. So when we think what is a Burberry trench and why is that – why are people willing to pay more for that.

For some it's style, some its fashion, some it might be even that somebody wants a trench that’s made in England. But again it's hard for a competitor to just come one day and say hey I have got trenches made in Chicago they look just like Burberry, you'd still probably pay a premium for Burberry.

Wall: And of course the stock has recovered slightly since May, since that low of £10.70 what's driven that, because there has been some news from the company recently hasn’t there.

Swinand: Well the interesting thing is when a wide moat stock like LVMH or Burberry or Prada. When they have a low stock price below what we think the fair value is generally there are lot of clouds in the horizon that are very visible to investors.

The problem here is that because the growth in China has slowed investors don’t really see any good news on the horizon that would take the stock higher again. Another issue has been that Europe has been a tailwind for the luxury industry as the euro fell a year ago, international tourists rushed in to buy goods at low prices in Europe. The latest thing is of course with a cheap pound, tourists have been rushing in to London to buy Burberry although we think that in the long run the exchange rate fluctuations will wash out of the real valuation of the stocks.

Wall: There has been some change in the top as well which always causes analysts to rethink about any stock. A change in senior management. Is a time to pause and rethink how we value something.

Swinand: When we rate a company in a wide moat especially 100 year old brand. There are going to many CEOs over that brand's lifetime. So, yes I think it’s a positive change I don’t think they were doing anything so wrong. Sometimes investors get a little anxious or they get a little impatient when they want results to come more quickly.

So I don’t see that as the reason the stock is up or down. I do think however that Burberry is a little more middle priced in the luxury spectrum. I think they are going to benefit from strong middle class growth in China and emerging markets. So in a lot of ways I like Burberry better than some of the ultra-high-end stocks like Hermes that haven’t done as poorly because they have very high end customers that haven’t slowed down at all. In the long run it might be harder for them to outpace the growth of their peers.

Wall: So undervalued at this current price but perhaps it might be bit of a bumpy road along the way.

Swinand: Exactly. In other words, it's hard to find stocks that have a clear catalyst coming up without a bumpy road, no risks, no headwinds that are also wide moats and nobody wants to own right now.

Wall: Paul thank you very much.

Swinand: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Burberry Group PLC2,250.00 GBX1.40
About Author Emma Wall

Emma Wall  is Editor for Morningstar.co.uk