Interactive Investor

Insider: boss buys shares that are ‘simply too cheap’

24th July 2023 07:48

by Graeme Evans from interactive investor

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This iconic company has disappointed shareholders, and the issue now is one of confidence rather than valuation, thinks one City expert as the CEO just spent £0.4 million on stock.   

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Shares in bootmaker Dr. Martens Ordinary Shares (LSE:DOCS) are showing early signs of rewarding the faith of its chief executive Kenny Wilson after he spent £400,000 on an increased stake.

The FTSE 250-listed company closed last week at 142.1p, which compares with the 129p when Wilson made his purchase a few days earlier.

Shares were as low as 113p in early July after a recent string of profit warnings, mainly caused by supply bottlenecks at its new Los Angeles distribution centre.

Wilson admits the company has made operational mistakes, but said fixing these issues and returning America to good growth was the number one priority.

Trading in the UK and elsewhere has been much better, highlighting the continued strength of the brand as annual revenues recently topped £1 billion for the first time.

Earnings per share fell 29% to 12.9p, but confidence in the “strategy, long-term growth and cash generation” meant an unchanged dividend of 4.28p a share worth £42.8 million was paid last Tuesday. A £50 million buyback programme is also underway.

Unchanged guidance in July’s AGM trading update and relief that inflation is falling and interest rates may be near their peak, have helped to put DM shares back in the buying zone.

The shares trade on about 12 times forward earnings, although for broker Peel Hunt the issue following four profit warnings in five months is one of confidence rather than valuation.

It said after June’s annual results: “The brand potential and lack of penetration across core European and US international markets is as compelling as ever, but the key priority has to be stabilising margins to give a sense that the business has found a floor to build from.”

The broker believes the medium-term potential “is not without attraction” but for now it has a “hold” recommendation and 150p price target.

Bank of America is more upbeat after a note published on 14 July set out five reasons to buy the shares, including them being “simply too cheap” for a company that’s forecast to deliver 10% compound earnings growth and 14% return on equity.

Other positives include the fact that expectations look to have been reset after the run of profit warnings, while there’s the benefit of operational and personnel changes.

Bank of America adds that the “brand is not broken” after its popularity improved six percentage points in the UK over the past three years, with a forecast 14% return on capital employed also ahead of peers.

The bank downgraded earnings expectations for the period 2024-26, mostly due to lower margin expectations, after Wilson warned in annual results about the need for higher investment costs to support greater scale and long-term growth ambitions.

This means its price target has come down from 210p to 165p. The shares were priced at 370p when the company was valued at £3.7 billion in its January 2021 flotation.

The bank said: “We see an opportunity to consider the stock given more robust earnings expectations and signs of a cleaner equity story to come.”

Other directors have also bought the shares in recent weeks, with Rightmove finance director Robyn Perriss, senior independent director Lynne Weedall and former Carphone Warehouse boss Andrew Harrison spending a combined £43,700 at around 135p in June.

An AIM share about to accelerate?

Four directors of AIM-listed Surface Transforms (LSE:SCE) have spent £300,000 backing shares in the UK’s only maker of carbon ceramic brake discs to accelerate.

Demand has increased from £2 million sales in 2020 to an estimated £20 million in 2023 and £30 million in 2024, but installing capacity to meet this commercial success hasn’t been easy.

Matters weren’t helped by a major customer having to delay the start of production by six months, while the Liverpool-based company has had to deal with several individual but unrelated technical problems in its own production.

Sales for 2022 missed expectations, but with the issues now in the rear-view mirror the company is ready to deliver its large order book.

Its technology reduces the brake system operating temperature, resulting in lighter and longer life components with superior brake performance.

Chair David Bundred said in the annual report that 2022 had catapulted the company from being regarded as a start-up to a “serious participant in the plans of mainstream automotive companies”.

He was one of the four non-executive directors to buy shares on 14 and 19 July at an average price of 32.22p.

The stock closed last week at 34.5p, up from 26.5p prior to June’s AGM update when guidance was reiterated, and the company forecast excess capacity over demand by the fourth quarter.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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