The Superdry share price is up 50% in a month! Yet I think it’s still a bargain

At the beginning of December, I explained why I recently increased my stock Super dry (LSE: SDRY) to my portfolio. It has been a profitable decision, with the stock price rising more than 50% over the past month.

But I think there may be benefits to come. If I had spare cash to invest today, I would consider buying more Superdry shares, even after the steep rise in recent weeks. This is why.

Price mismatch

Last month, Superdry shares looked like they were priced for disaster. The company has a market capitalization of less than £100m, despite having limited debt and a strong brand.

But there is indeed a risk of disaster. The company is reorganizing its lending facilities, starting negotiations with specialist lenders. As an investor, this does not inspire my confidence in the perceived credibility of the company.

The deal was eventually completed, although the lenders exacted a heavy price in the form of steep interest rates that could have benefited Superdry. But with the overhanging risk of losing its borrowing capacity, Superdry’s share price has risen sharply. Despite that, I still think it looks very undervalued right now.

Long term potential

Over the past five years, the stock has remained in the red. They have lost more than 90% of their value. This is a dismal record.

What interests me is the price movement, which is why Superdry has appreciated so much. Past performance is no guide to what will happen in the future. However, at some point in fairly recent memory, investors saw Superdry as an attractive proposition with a very valuable business. What happened?

Negative perception

The company is changing management and investors feel it risks losing its youth-driven cachet. For the marketing of certain lifestyle fashion brands, that can be fatal.

But here’s the thing. In 2017, revenue was £752m. The latest financial report of the Company’s revenue is 610 €. So while profits have declined over those five years, the decline is 19%. That is substantial, but smaller than the decline in Superdry’s share price over the same period.

It is at the level of profit that it shrunk more dramatically. Underlying earnings per share of 81.2p in 2017 fell to 27.7p last year, a drop of more than 60%.

Last year’s sales are still strong and the company is in growth mode, with a 3.6% increase for the first half of the current financial year. So I think the worry about brands losing customer appeal is overstated.

But what clearly needs work is the company’s profits. Risks like inflation could continue to erode margins.

Potential bargains

Management now seems to be working to get the company back on track, as evidenced by growing sales. Meanwhile, although last year’s earnings per share were lower than the previous five years, they were still quite large.

Superdry’s current share price means the company is trading at a price-to-earnings ratio of less than 6. If profits improve, the ratio could improve going forward.

It seems like a great value to me. With cash to spare, I would consider jumping at the current price to add more Superdry shares to my portfolio.