With an activist on board, is it time to buy Dr. Martens shares?

With a strong brand, a share buyback programme, and an activist investor on board, Stephen Wright thinks Dr. Martens shares might be too cheap to ignore.

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Shares in Dr. Martens (LSE:DOCS) have been falling since they first appeared on UK exchanges in 2021. Today, the stock is on sale at a 66% discount to its IPO price.

Created with Highcharts 11.4.3Dr. Martens Plc PriceZoom1M3M6MYTD1Y5Y10YALL2 Aug 20182 Aug 2023Zoom ▾Jan '19Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '232019201920202020202120212022202220232023www.fool.co.uk

The underlying business has had its problems, but it also has a lot of attractive attributes. And these have been drawing the attention of an activist investor, which might just help unlock some value for shareholders.

Brand power

One of the company’s most important assets is its brand. This is something investors place a high value on.

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A strong brand allows a company to do more with less. Coca-Cola (one of Warren Buffett’s most successful investments) is a great example of this.

Coca-Cola generates $12bn in income using $9.8bn in fixed assets – a return of 122%. But Dr. Martens is right there with them, with a 108% annual return.

Activist buybacks

There’s clearly something of value here. But this isn’t being reflected in the share price, which is why the stock has been attracting the attention of activist investment funds.

Sparta Capital, led by Franck Tuil, has been building a stake in the FTSE 250 laggard. It thinks the company could be run in ways that would unlock this value for shareholders

One way of doing this is through share buybacks. Repurchasing shares reduces the number outstanding and boosts earnings per share.

This is especially the case when a stock is trading at a low price. And this is the case with Dr. Martens shares. 

Management currently has authorisation to use £50m for share buybacks. At today’s prices, that implies a 3% return.

I’ve heard it speculated that the buyback programme is the result of Sparta Capital’s involvement. But either way, it looks very positive to me for shareholders.

Risks

The stock is currently trading at a price-to-earnings (P/E) ratio of around 12, which is fairly cheap. But it’s also a sign investors don’t have confidence in the business.

The company has had a number of problems recently. Most of these have come from its attempt to shift to direct-to-consumer sales, rather than wholesale distribution.

Inventory issues at its distribution centre in Los Angeles have created problems and the change in strategy has proved expensive. This has been a headwind for margins and profits.

On top of this, household budgets are under pressure at the moment. That’s been weighing on demand for a number of companies, and Dr. Martens is no different.

A stock to buy?

Dr. Martens is working through a number of issues, some of which are of its own making. But good companies can go through difficult times and still turn out well.

I think that might be the case here. Activist involvement might hurry the process along, but I think the firm’s intangible assets look attractive to me at today’s prices even without the potential catalyst.

As a result, I’m seriously considering adding the stock to my portfolio. I don’t think I need to be in a rush, but I do see this as a stock to buy.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Pound coins for sale — 51 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

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