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In early December, I explained why I had recently added shares in super dry (LSE:SDRY) to my portfolio. That has already been a lucrative move, with the share price jumping more than 50% over the last month.
But I think there could be more gains to come. If I had extra money to invest today, I would consider buying more Superdry shares, even after their sharp rise in recent weeks. This is why.
price mismatch
Last month, it looked like Superdry shares were priced for disaster. The company had a market capitalization of less than £100m, despite having limited debt and a strong brand.
But there really was a risk of disaster. The company was reorganizing its borrowing facilities, having started negotiations with a specialized lender. As an investor, that doesn’t inspire my confidence in a company’s perceived solvency.
The deal was later finalized, although the lender obtained a high price in the form of high interest rates that could hurt Superdry’s profitability. But with the remaining risk of losing its borrowing capacity removed, Superdry’s share price rose dramatically. Despite that, I still think he looks very undervalued nowadays.
long term potential
Over the past five years, stocks have remained deeply in the red. They have lost more than 90% of their value. That’s a lousy record.
What interests me about the price movements is why Superdry was so highly valued in the first place. Past performance is not a guide to what will happen in the future. Still, at some point in fairly recent memory, investors saw Superdry as a compelling proposition with a very valuable business. What happened?
negative perceptions
The company changed management and investors felt it risked losing its youth-driven appeal. For a fashion brand that markets a certain lifestyle, that can be fatal.
But here’s the thing. In 2017, revenue was £752 million. For the company’s most recent financial year, it was £610 million. So while revenue fell over those five years, the decline was 19%. That’s substantial, but much less than the drop in Superdry’s share price over a similar period of time.
It’s at the earnings level that things slowed down most dramatically. Basic earnings per share of 81.2p in 2017 fell to 27.7p last year, a drop of more than 60%.
Sales last year were still substantial and the company is in growth mode, up 3.6% in the first half of the current year. So I feel that concerns about the brand losing its customer appeal have been overstated.
However, what clearly needs work is the profitability of the company. Risks such as inflation could continue to hurt margins.
potential bargain
The current management seems to be working to get the company back on track, as evidenced by the increasing sales. Meanwhile, while earnings per share last year were much lower than five years earlier, they were still sizeable.
Superdry’s current share price means the company is trading with a price-earnings ratio of less than 6. If profitability improves, that ratio could be even more attractive in the future.
That sounds like excellent value to me. With extra money, I would consider jumping to the current price to add more Superdry shares to my portfolio.
