Since the IPO in early 2021, Dr. Martens (OTCPK:DOCMF) has been on a rollercoaster ride with its share price taking a nosedive each passing month. However, the company’s financial standing tells a different story, one that Wall Street seems to be blissfully ignoring as the stock continues to tumble.
After the H1 FY2024 results were made public, the market once again delivered a harsh blow to the stock, dragging it down by a staggering 25% on November 30. Nevertheless, at its current price, Dr. Martens presents a tantalizing opportunity that is not to be overlooked.
Established in 1960 in London, Dr. Martens has weathered numerous storms throughout its history, experiencing both remarkable successes, especially during the 1970s and 1980s, and challenging periods, as evidenced by the early 2000s. However, after a resurgence around a decade ago, the company made the bold decision to go public in early 2021.
Despite strong beginnings, the stock’s value has seen an overwhelming 80% decline, a consequence of an overhyped IPO. Initially overvalued at £3.70 per share, the subsequent collapse seemed justified, but the current price of £0.85 presents an entirely new scenario.
From FY2014 to FY2023, Dr. Martens has exhibited consistent and sustainable growth, demonstrating improvement in revenues, gross profits, operating income, and net income year on year. The company’s cash flow has followed a similar upward trajectory, with free cash flow displaying a positive trend until a recent inventory increase due to a decline in demand, a common challenge faced by clothing and shoe retailers.
Moreover, Dr. Martens’ margins have stood out significantly, showcasing a stark improvement from a gross margin of 46.30% in FY2014 to an impressive 61.80% in FY2023, setting it apart from its struggling industry peers.
H1 2024 Analysis
The release of H1 FY2024 report triggered a 25% stock decline, despite the company’s consistent growth over the past decade. Dr. Martens recorded a marginal 5% decrease in revenues, attributable to a challenging macroeconomic environment and a minimal 1% drop in gross profit. The stock market’s astigmatic reaction failed to acknowledge the commendable improvement in gross profit margin, standing at 64.40%, underscoring the company’s resilience.
The decline in profits by £25.70 million from the previous year was influenced by increased depreciation and amortization, coupled with underperformance in the wholesale segment, which saw revenue fall by £39.40 million.
Valuation and Future Outlook
Despite these challenges, a discounted cash flow model indicates an undervaluation of Dr. Martens, projecting a fair value of £0.96 per share. While the company faces short-term headwinds, long-term potential is undeniably strong, especially with management’s unwavering confidence reflected in the ongoing share buyback program and sustained dividend. This, combined with a robust dividend yield of approximately 7%, makes Dr. Martens a compelling stock pick, particularly after the recent precipitous drop.
Although not without its hurdles, Dr. Martens is a resilient company with a rich history, high margins, and exceptional competitive advantage, thus presenting an enticing prospect at its current price.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.