Burberry – time to sell?

I have held Burberry in the model portfolio since February this year, it was a bit of a contrarian purchase in that it had lots of positive attributes but had fallen out of favour dramatically with a decline of over 37% from its peak in April 2015. Whilst this share hasn’t been held very long the portfolio has benefited by 13.9% as the share has recovered strongly and the price ratios have risen; these are the indicators that put me on alert especially with the CAPE (Cyclically Adjusted Price Earnings) rising above 16x  – however, is this a always a reason to sell?

When thinking about a sale its important to apply the processes that made you buy the asset in the first place to see whats changed and if the strategy has played out as you expected – my initial summary looked at some familiar key factors:

  1. Current ratio greater than 1.75x
  2. Interest cover greater than 2x
  3. Dividend cover greater than 2x
  4. Positive Net Current assets
  5. Debt to Equity ratio less than 1
  6. CAPE/PE10 less than 16x

All of these criteria with the exception of number 6 the CAPE/PE10 ratio continue to be met and there may well be some more mileage in the share yet as whilst the CAPE is above 16x (22.64x) the share has historically traded at higher levels with an average of 27x – a reversion to this mean would likely be a trigger to sell.

burberry CAPE

Whilst I am not a huge fan of the PE ratio as it can often be extremely volatile there are also a number of factors that mean I am sticking with this share for the moment: –

  1. The PE ratio is over 46% below its peak for the last 5 years, which is a good indicator that value exists
  2. Forecast EPS for next year is slightly lower (-4.80%) less than the worst decline of the last ten years at -6.70%
  3. Applying average EPS and PE ratios from history and forecasts gives a price range for the next full year of £12.28 to £20.21 with a median of £15.5 this suggests that the maximum decline would be around 7%, the maximum gain 53% and the median gain around 18% – it would appear the odds are skewed to possible positive outcomes.
  4. Burberry could outperform analysts estimates, an earnings surprise would produce a positive outcome for the share price.

Overall I feel some value continues to exist and I am retaining the share – a rise toward the median price forecast of £15 would make me consider selling the holding.

Leave a Reply

Your email address will not be published. Required fields are marked *