Image source: Aston Martin
Shares of posh chocolate seller Hotel Chocolat surged 160% on Thursday (16 November) after confectionery giant Mars said it will buy the UK firm for £534m. This chunky premium suggests that the market had been undervaluing the business. Could there be other undervalued luxury stocks to buy for my ISA in 2024?
Here are two candidates.
Burberry
Also on Thursday, FTSE 100 fashion group Burberry (LSE: BRBY) posted its H1 results. In response, the stock fell almost 10% to £15.73.
This means the share price has dropped by nearly a quarter in 2023. Over five years, it’s down 13%.
To be fair, the culprit for the sell-off — a slump in demand for luxury goods — isn’t unique to Burberry. Big players across the industry, including LVMH, have been warning about slowing demand in recent months.
Burberry confirmed this slowdown could affect its full-year sales. Management said: “If the weaker demand continues, we are unlikely to achieve our previously stated revenue guidance for FY24.”
For the year ending March 2024, this could mean adjusted operating profit towards the lower end of the current consensus range (£552m-£668m).
The company did increase first-half sales 4% year on year to £1.4bn, but growth was hampered by foreign exchange headwinds.
In the Asia Pacific region, the first six months was very much a tale of two quarters. Sales growth of 36% in Q1 slowed to just 2% in Q2, with mainland China sales falling by 8%.
This points to a couple of issues regarding Burberry. One, it doesn’t have a diverse basket of brands to help offset such weakness. Second, its largest growth market is China, where consumer confidence is low.
Bright spots
CEO Jonathan Akeroyd confirmed this revenue warning was related to macroeconomic concerns and not the recent collections from new creative chief Daniel Lee. These products had been well received by wholesale customers, he reassured.
Another positive was that the interim dividend was hiked by 11% to 18.3p. The stock now yields an attractive 3.8%.
Plus, the P/E ratio is currently an undemanding 12.5. Of course, we don’t know where near-term profits are now heading. But at first glance, that valuation seems too cheap to me.
Therefore, I’ve put the stock on my watchlist while I dig in further.
Aston Martin
The second luxury stock I’ve been eyeing up is Aston Martin (LSE: AML).
The share price is down a staggering 94% since the iconic British carmaker went public in late 2018.
On 1 November, the firm said Q3 production problems on its new DB12 model meant 2023 volumes will come in at 6,700 units instead of 7,000.
It booked a quarterly adjusted operating loss of £48.4m on net revenue of £362m. Both missed market expectations.
On a positive note, Executive Chairman Lawrence Stroll said there has been “extraordinary demand” for the new DB12. And 55% of initial buyers are new to the brand, he noted.
However, it still has a worryingly large net debt position (£750m in Q3). And I fear yet more shareholder dilution could be on the cards.
Will Aston Martin be a highly profitable company in five to 10 years from now? Or still loss-making? Or acquired? I have absolutely no idea, and that’s my concern. I’ll just keep holding Ferrari shares for now.
