One thing I’ve noticed during my time as a private investor is that the stock market loves earnings growth.
Indeed, whether that growth is off the back of short-termism from management or the successful delivery of a longstanding strategy seems to matter not. If the bottom line is growing at a brisk pace then shares are likely to be bought, with the share price heading north off the back of the increased demand.
So, looking at the earnings per share (EPS) growth forecasts for Burberry (LSE: BRBY) (NASDAQOTH: BURBY.US) makes me feel optimistic about its future.
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For instance, EPS is expected to grow by 9% this year and 13% next year, both of which are well above average and should be achievable given Burberry’s considerable exposure to faster growing markets.
However, what makes me even more bullish on Burberry is that when the above EPS forecasts are combined with the price to earnings (P/E) ratio of 19, it generates a price to earnings growth (PEG) ratio of 1.7.
This may initially sound rather high and some way off the PEG sweet spot of 1.0. However, for Burberry this figure is relatively low, with the PEG having been above 2.0 in the recent past. Furthermore, the PEG ratio remains well below the average for the wider index, with the FTSE 100 having a P/E of 13.8 and the average EPS growth rate being mid single digits.
Indeed, were Burberry to trade on a PEG of 2.0 (which would still be less than that of the wider index and within its range over the last few years), it would mean shares trading at around 1710p and offering a capital gain of 16.5% from its current price of 1470p.
Meanwhile, a current yield of 2.2% could top the total return up to over 20% over the medium to long term, meaning that Burberry seems to offer a large amount of potential at current price levels.
Of course, the famous Burberry check may not be to everyone’s taste, nor may all investors comprehend why a pair of jeans can cost £250 or more. However, the Burberry brand remains strong and appears to offer the one thing that investors just can’t get enough of: earnings growth.
