Shares in luxury goods manufacturer, wholesaler and retailer, Burberry (LSE: BRBY) have been on a roll since last year’s surprise EU referendum result. Dipping as low as 1,061p towards the end of June, the stock now trades at 1762p — a rise of 66%.
While hindsight is a wonderful thing, Burberry’s relentless rise over the last eight months is yet another example of how buying solid companies when other investors are selling has the potential to make a noticeable difference to your wealth once sentiment recovers.
That said, the questions investors in the £7.5bn cap must now ask themselves is whether this kind of performance can continue and if not, are there better opportunities elsewhere?
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Time to sell?
Trading on 23 times earnings for 2017, Burberry’s shares certainly give the impression of being fully valued at the current time, particularly as earnings have been patchy over the last couple of years.
In its defence, the blue chip’s stock has rarely been on a cheap valuation and with good reason. The company has generated consistently high returns on capital over recent years and is also hugely cash-generative. Assuming it can achieve the 8% earnings per share growth pencilled-in for 2018, the price-to-earnings (P/E) ratio also reduces to 21 in 2018. That’s still expensive, albeit not ludicrously so.
Nevertheless, if you’re on the hunt for growth, one of Burberry’s peers may be more to your liking.
Walking tall
Thanks to a series of positive updates, shares in luxury shoe specialist Jimmy Choo (LSE: CHOO) now change hands for 66% more than last June’s pre-referendum low of 96p. Despite the market’s rather muted reaction, I can see further upside in 2017 based on today’s full-year results from the company.
In the 12 months to the end of December, revenue climbed 14.5% to £364m thanks to decent retail performance in the second half and sterling’s recent weakness. Adjusted EBITDA rose 15.7% to £59m, driven — according to the company — by “strong sales growth, margin improvement and lower growth in overheads“. While like-for-like sales dipped by 0.8% over 2016, operating profits rose a healthy 42.6% to £42.5m.
Building on its January update, Choo has continued to see strong progress in markets such as Asia, Europe and Japan, with its respectable retail performance in the US offset by the company’s “planned reduction” in wholesale. Its men’s division continues to grow rapidly and now accounts for 9% of revenue. Assuming this momentum can be sustained, I wouldn’t bet against Choo’s share price continuing to climb.
On the downside, stock in Choo — like that of Burberry — isn’t exactly cheap. Although earnings per share are expected to rise by 23% in the coming year, a P/E ratio of 19 doesn’t scream value. The not-insignificant amount of debt on its balance sheet and lack of dividends are also in sharp contrast to Burberry’s vast net cash position and 2.2% yield for the current year.
Bottom line?
While higher estimated earnings growth at Jimmy Choo would imply that it’s the better buy for those investors motivated by the prospect of capital gains, Burberry’s scale and history of generating above average returns on capital may suit those whose investing style is more risk-averse.
Regardless of which appeals most, anyone considering stocks in the luxury goods sector must also be sensitive to the fact that sentiment can quickly diminish if macroeconomic or political events conspire to make markets anxious.
