Iconic bootmaker Dr Martens (LSE: DOCS)’s stock hit the public markets on 2nd February when private equity firm Permira sold a 35% stake in the company. The shares were initially sold at a price of around 370p, but in the last few weeks massive investor demand has pushed the share price up by over 30% at the time of writing to 492p, giving the company a valuation just shy of £5 billion.
What’s driving this demand?
One reason Dr Martens stock is appealing to investors is the company’s strong fundamentals. In FY2020, Dr Martens grew revenues by 48%, up from 30% the previous year. EBITDA (earnings before interest, taxes, depreciation, and amortisation) has also increased by 92% annually between FY2018 and FY2020, and profits have gone from negative £5.7 million to positive £74.8 million over the same period.
Margins are good with operating and net profit margins of 21.1% and 11.1% respectively in FY2020, and the company also achieved a ROCE (return on capital employed) of 31% in the last fiscal year, indicating a high level of efficiency.
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Covid-19 has demonstrated the business’ resilience, with revenues growing by 18% in the six months between March 2020 and September 2020. A large part of this has been down to investments in ecommerce in a bid to increase the direct-to-consumer side of the business, which is now responsible for 45% of sales, up from 26% in FY2015. This is likely to be a major catalyst for growth in the coming years.
The balance sheet isn’t too bad, either. As of September 2020, the company had a net debt (excluding lease liabilities) of -£269.2 million, representing a manageable 1.3 times trailing twelve-month EBITDA.
Probably the best thing Dr Martens stock has going for it, however, is its iconic brand. Its chunky, lace up boots are instantly recognisable and have a rich history of symbolising youthful rebelliousness since the 60s. Although today the boots have a wider appeal, with 11 million boots having been sold across 60 countries in FY2020, the company has maintained its exceptionally strong brand, giving Dr Martens significant pricing power and protection from competition.
Is the stock undervalued?
The recent sharp increase in share price has certainly made the company more expensive, with the shares now trading at just over 57 times trailing twelve months earnings (September 2019 – September 2020). This seems excessively high when compared to broad markets such as the FTSE 100, which is currently trading at a price-to-earnings (P/E) ratio of 17.55.
However, as mentioned, Dr Martens is growing at a very fast pace. If Dr Martens manages to maintain this pace for an extended period of time, this valuation doesn’t seem too bad. In fact, when compared to similar companies, such as Nike, which is trading at a P/E of 79.88 having grown revenues at a CAGR (compound annual growth rate) of just over 4% over the last five years, this price seems very attractive.
One thing Dr Martens does lack is a long history of profitability. But the company’s investments in ecommerce and its strong brand make me confident that it can continue to grow rapidly in the future, making Dr Martens stock a buy for my portfolio.
