Is FTSE 100 Stalwart Burberry a Good Value?

LONDON -- Capital appreciation is surely the goal of many investors. One method of achieving that is to buy companies with steady earnings growth. If they're bought when the shares are cheap, two drivers could move the share price up:

  • growth in earnings
  • an upward P/E rerating

Highly successful fund manager Peter Lynch classified steady growers as Stalwarts, which he typically traded for 20% to 50% share-price gains. But whether buying for gains like that or holding for the longer term, we need to know if reliable earnings growth can continue, and whether the shares are cheap.

Seeking durable growth
Not all companies achieve stable growth, as you can see by the aggregate performance of those in London's premier FTSE 100 index, where the compound annual earnings-growth rate has been just 0.7% over the last five years:

Year to June

2007

2008

2009

2010

2011

2012

FTSE 100 index

6,608

5,626

4,249

4,917

5,946

5,571

Aggregate earnings per share

537

503

427

397

527

557

Consistent, cash-flow-backed growth in profits is a promising characteristic in today's markets so, for this series, I'm examining firms with annual earnings growth between 4% and 20%.

One contender is Burberry Group  (LSE: BRBY  ) , which is an international clothing brand supplier, famous for its distinctive check design. This table summarizes the company's recent financial record:

Trading Year to March

2008

2009

2010

2011

2012

Revenue (million pounds)

995

1,202

1,185

1,501

1,857

Adjusted earnings per share (pence)

32.4

30.6

35.9

49.9

62.8

So, earnings have grown at an equivalent 18% compound annual growth rate, putting Burberry in the Stalwart category.

Recent interim results confirm the continued, seemingly unstoppable, progress of the juggernaut that is super-brand Burberry. Sales are up. Profits are up. Everything desirable seems to be up, as usual. But it's no accident that the "oh so very English" check-pattern brand, first established in 1856, zips along with an appeal like that of a trendy new fashion upstart hitting the high streets for the first time. The company works very hard to ensure that Burberry doesn't lose its appeal, with a sophisticated marketing strategy.

In some areas, Burberry is, indeed, hitting the high street for the first time. The fast-growing Asia-Pacific region currently contributes an exciting 37% of sales, for example. Yet demand is robust in more traditional markets, too, with well over half the company's revenues derived from Europe and the Americas. Clothing accounts for around 61% of worldwide sales and the company finds imaginative uses for the pattern to generate the remaining 39%.

Burberry is still hip and desirable. I think that bodes well for further progress with earnings growth.

Burberry's earnings growth and value score
I analyze five indicators to determine whether earnings growth can continue and if the shares offer good value:

  1. Growth: Revenue, earnings and cash flow have all been growing steadily. 5/5
  2. Level of debt: At the last count, there was net cash on the balance sheet. 5/5
  3. Outlook and current trading: Good recent trading and a positive outlook. 5/5
  4. Enterprise value to free cash flow: A trailing 22 or so, above historic growth rates. 3/5
  5. Price to earnings: A trailing 21 or so and just above historic growth rates. 3/5

Overall, I score Burberry 21 out of 25, which encourages me to believe this stalwart can continue earnings growth that outpaces that of the wider FTSE 100. The shares offer a full price for the company when compared to the FTSE's price to earnings ratio of around 11 and the firm's growth predictions.

Foolish summary
Burberry is trading well and further growth seems likely. That hasn't gone unnoticed, though, and the scoring dips on the valuation measures, indicating that immediate growth expectations seem to be priced in.

Right now, forecast earning growth is 14% for 2014, and the forward P/E ratio is 17.6 with the shares at 1,322 pence. Considering that and the other factors analyzed in this article, I think that looks like fair pricing, so I'm keeping the shares on watch, for now.

Burberry Group is one of several steady-earnings-growing stalwarts on the London stock exchange, each with the potential to deliver significant capital appreciation when purchased at sensible prices.

If you, like me, are serious about capital gains, I recommend you now read "The One U.K. Share Warren Buffett Loves," which is a time-limited Motley Fool free report discussing the British Stalwart that has recently attracted some of the American super-investor's billions.

This one U.K. share ticked the boxes for Warren Buffett on growth prospects and cheapness; maybe it will for you too. Click here to access the report while you still can.

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