Thinking of buying the Burberry share price? Read this first

Person using calculator next to charts and graphs
Person using calculator next to charts and graphs

Luxury fashion retailer Burberry Group (LSE: BRBY) is well known for its upmarket British style. But while classy dressers need to update their wardrobes every year, the firm’s shares have proved to be a very good long-term buy.

Burberry’s share price has risen by more than 750% over the last 10 years, compared to a 61% gain for the FTSE 100. Fears of a US-China trade war have dented the group’s share price recently, but half-year accounts published today suggest sales are holding up.

During the six months to 29 September, the group’s sales rose by 3% to £1,220m, excluding the discontinued Beauty wholesale business. Adjusted operating profit was 4% lower, at £178m, but this fall was solely due to shifting exchange rates. The group’s adjusted operating margin remained unchanged, at 14.6%.

Time to buy?

Chief executive Marco Gobbetti says that the firm has seen an “exceptional response” to designer Riccardo Tisci’s debut collection and the company’s rebranding.

However, Mr Gobbetti’s turnaround plan is still in its first year and the group’s peak trading takes place during the second half of its financial year, which ends in March. This might explain why the shares haven’t moved following today’s announcement.

I’m attracted by Burberry’s consistently high profit margins and by the proven appeal of its brand — the firm has now been in business for 162 years. This commercial strength is backed up by a strong balance sheet, with net cash and high returns on capital employed.

The stock currently trades on a 2018/19 forecast price/earnings ratio of 22.5, with an expected dividend yield of 2.4%. This isn’t cheap, but in my view it could be a fair price to pay if you’re a long-term investor.

Another proven winner

One business I’ve been tempted to add to my own portfolio is Hargreaves Lansdown (LSE: HL). This firm is by far the largest of the DIY investment platforms in the UK, with a market share that’s now well over 30%.

It generated an operating profit margin of 65% last year, the second-highest figure in the FTSE 100 (after Rightmove). Over the years, such high profit margins have led to concerns that competitors would steal market share by offering lower costs.

So far, this hasn’t happened. I’m not sure it will — the firm’s size now means it enjoys economies of scale that help to reduce regulatory and IT costs per user. It also has considerable bargaining power on fund costs.

What price would I pay?

Hargreaves Lansdown generated a return on capital employed of 72% last year. That means that for each £100 invested in the business, the firm earned £72 of operating profit. That’s exceptionally high — I’d normally rate anything above 15% as good.

Such strong returns mean that cash generation is good, so the firm can fund expansion and shareholder returns without needing to borrow money.

This is certainly a stock that I’d like to own, at the right price. At the last-seen price of 1,900p, the stock trades on a 2018/19 forecast P/E of 33, with a prospective yield of 2.4%.

I think this might be a fair price to pay, but for a greater margin of safety I’d like to target an initial yield of at least 2.75%. That would mean a share price of about 1,625p. That’s not necessarily unrealistic — the shares traded at that level as recently as March.

Capital Gains

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry, Hargreaves Lansdown, and Rightmove. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.