Could I double my money with Dr Martens shares?

Great British boot maker Dr. Martin (LSE: DOCS) experienced a 30% drop in shares following its trading statement at the start of the year. The stock is now down 70% since its 2021 IPO.

If I believe that this famous brand in the world is undervalued, it will not take too much recovery to double the money I have to buy its shares. And the financials show more than just promise.

Impressive growth rate and low cost

Earlier this year, Dr Martens announced that its revenue growth forecast for the year would drop to 11-13%. Two operational problems in the US distribution center and “unseasonably hot weather” which resulted in fewer people buying boots being the reason. This caused a 30% drop in the share price, but this was a temporary problem.

11-13% revenue growth is still good, and the growth rate has doubled in years. Revenue increased from £348.6m in 2018 to £908.3m in 2022, margins were over 60%, and free cash flow rose 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 too cheap for a stock with historical growth rates and expectations of future sales increases. By comparison, the FTSE 250 The 10-year price-to-earnings average hovers around 20. Throw in a 2% dividend yield and the stock looks like a bargain to me.

However, this could be one of those times when some big numbers could mean I miss the wood for the trees. That’s what I mean.

Not a pretty picture

The Dr Martens story was family owned until 2013 when it was bought for around £300m by private equity firm Permira. This is not a good sign, as the company has a bad reputation for reducing the short-term value of a company with drastic cost-cutting measures.

A little research into what customers think does not paint a pretty picture with a relatively low Trustpilot rating. The quality of the boots is being criticized, despite the premium prices, and this is included in it Made in England line as well as the majority of footwear that is currently produced overseas.

It is clear that significant cost cutting has occurred.

Permira is taking Dr Martens public in 2021 at a valuation of £3.7bn, although its current market cap is around £1.5bn. So as profits increase, so does the market cap. Also, it seems that a lot of the 70% drop in the stock price is because it was initially overpriced at the IPO. All that suggested to me was not a complete offer.

While the financials and growth look very good, I am concerned about the long-term impact of the push to cut even more profit on the product. So, I will look elsewhere for stocks that may have an opportunity to double my money.