Is Now the Time to Buy Burberry?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at Burberry  (LSE: BRBY.L  ) to determine whether you should consider buying the shares at 1,230 pence.

I am assessing each company on several ratios:

Price/Earnings (P/E): Does the share look good value when compared against its competitors?

Price Earnings Growth (PEG): Does the share look good value factoring in predicted growth?

Yield: Does the share provide a solid income for investors?

Dividend Cover: Is the dividend sustainable?

So let's look at the numbers:

Stock

Price

3-Yr. EPS Growth

Projected P/E

PEG

Yield

3-Yr. Dividend Growth

Dividend Cover

Burberry 1,230 75% 18.6 2.5 2% 78% 2.5

The consensus analyst estimate for next year's earnings per share is 66.1 pence (7% growth) and dividend per share is 27.2 pence (9% growth).

Trading on a projected P/E of 18.6, Burberry looks cheap when compared to its peers in the Personal Goods sector, which are currently trading on an average P/E of 20.9. Burberry's high P/E and single-digit projected growth gives a PEG ratio of 2.5, which implies the share price is very expensive for the earnings growth the firm is expected to produce.

Offering a 2% yield, the dividend is currently stronger than the Personal Goods sector average. Burberry has a three-year compounded dividend growth rate of 78% , implying investors could see further payout growth.

Indeed, the dividend is two-and-a-half times covered, giving Burberry room for further payout growth.

What about Burberry's future prospects?
Over the last few years Burberry has seen rapid growth and investors have reaped the benefits.

However, Burberry forecasts that it will see almost no growth in its wholesale, licensing, and fragrance divisions next year. All of next year's growth will come from the retail side of the business.

Even though Burberry operates within the luxury sector, the firm is not immune to economic problems. Wealthy consumer incomes are being squeezed, as high earners come under pressure from austerity budgets. This pressure can be seen in other luxury stocks, such as Mulberry, which is feeling the pressure as well.

Burberry's recent interim results confirmed this slowing expansion. Underlying revenue grew 8% and was significantly lower than the same period last year, which saw underlying growth of 30%.

In my opinion, the high growth multiples currently attached to Burberry's shares are not sustainable based on the slowing growth figures. The company is still able to produce revenue growth, but not at the same speed it has done historically. With a lower prospective P/E than the sector average, Burberry appears relatively cheap. However, the high PEG ratio does make the firm look undervalued.

I do not like buying stocks that have such a high growth premium attached to them. So overall, I believe now does not look to be a good time to buy Burberry at 1,230 pence.

More FTSE opportunities
Although I feel now may not be the time to buy Burberry, I am more positive on the blue chips highlighted in "The Market's Top Sectors." This special report sees three Motley Fool Share Advisor analysts each studying a favorable industry -- and spotlighting a particular share to consider for this year and beyond. Just click here to download the special report today.

Rupert Hargreaves does not own any share mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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