Iconic British boot manufacturer Dr Martens (LSE: DOCS) saw its shares fall 30% after its trading statement earlier in the year. The stock has now fallen a startling 70% since its 2021 IPO.
If I believed this world-famous brand was undervalued, it wouldn’t take too much of a recovery to double my money were I to buy its shares. And the financials show more than a touch of promise.
Impressive growth rates and a cheap valuation
Earlier this year, Dr Martens announced that predicted revenue growth for the year would be downgraded to 11-13%. Both operational issues at a US distribution centre and “unseasonably warm weather” that caused fewer people to buy boots were the reasons. This is what drove that 30% drop in the share price, but these are temporary problems.
An 11-13% revenue rise is still good, and growth rates have been in double digits for years. Revenue increased from £348.6m in 2018 to £908.3m in 2022, margins are over 60%, and free cash flow has risen from £29.6m to £159.4m over the same period.
At its battered share price, Dr Martens trades at less than nine times earnings. That seems very cheap for a stock with this level of historic growth and expectations of good future sales rises. By comparison, the FTSE 250 10-year price-to-earnings average is hovering around 20. Throw in a 2% dividend yield and the stock seems like a bargain to me.
However, this might be one of those times where a few big numbers could mean I miss the wood for the trees. Here’s what I mean.
Not a pretty picture
The story of Dr Martens is that it was family-owned until 2013 when it was acquired for around £300m by private equity firm Permira. This is already not a good sign, as these firms have a poor reputation of squeezing short-term value out of companies with overzealous cost-cutting measures.
A little research into what customers think doesn’t paint a pretty picture with a relatively low Trustpilot rating. The quality of the boots is being criticised, despite the premium prices, and this includes the Made in England line as well as the majority of its footwear that’s now produced overseas.
It’s clear that significant cost-cutting has happened.
Permira took Dr Martens public in 2021 for an implied value of £3.7bn, although the market cap now stands at £1.5bn. So while revenues are up, the market cap has increased a lot already too. Also, it seems like much of the 70% drop in share price comes because it was initially overpriced at IPO. All of which suggests to me this is not a complete bargain.
While the financials and growth do look very good, I’m concerned about the long-term impact of the drive to squeeze out more profitability on the products themselves. As it is, I’ll be looking elsewhere for stocks that might have a good chance to double my money.
