On Monday, UBS announced an upgrade for Accent Group Ltd. (AX1:AU) from Neutral to Buy, setting a new price target of AUD2.20. The move comes as the footwear retailer's forward price-to-earnings ratio (P/E) falls below its five-year average, presenting what UBS sees as an attractive risk-reward scenario for investors.
Accent Group's current one-year forward P/E ratio stands at 13.8 times, notably lower than its five-year average of 14.7 times. This valuation places the company at a 4.7% discount compared to Universal Store Holdings Limited (UNI), which trades at 14.5 times and has historically enjoyed a 13% premium over a five-year average.
Moreover, Accent Group's valuation reflects a 24% discount to the ASX Small Ords index's P/E ratio of 18.2 times, which typically trades at a 20% discount over the same period.
The upgrade follows Accent Group's strategic moves, including the sale of Trybe and the exit from the CAT brand. The company also focuses on growth drivers such as adding 50 new stores by the fiscal year 2025, with potential upside risks. This expansion is despite near-term challenges like store closures and brand sales.
Accent Group's growth is further supported by the success of both vertical and distributed brands, including HOKA, Nude Lucy, Skechers, and Stylerunner. These brands are contributing positively to the company's gross margins. Additionally, the conversion of franchised The Athlete's Foot (TAF) stores to corporate ownership is expected to enhance operations.
The emphasis on sales growth and increased marketing effectiveness is seen as a way to offset the rising costs of doing business. UBS believes these factors, combined with the P/E multiple de-rating, make Accent Group's stock an attractive buy.
InvestingPro Insights
As UBS upgrades Accent Group Ltd. (AX1:AU) to Buy, investors are taking note of the company's compelling valuation and strategic initiatives aimed at growth. According to InvestingPro data, Accent Group's Price/Book ratio stands at 2.66, which may suggest that the company's assets are reasonably valued relative to the market. Additionally, the firm has demonstrated a capacity to generate cash, as evidenced by a strong free cash flow yield, a key metric for investors looking for companies that can sustain and grow their operations through internal financing.
Accent Group's commitment to returning value to shareholders is clear, with the company not only paying a significant dividend but also maintaining those payments for 16 consecutive years. This consistency is a testament to the firm's financial health and disciplined capital management, which could be a reassuring signal for long-term investors. Moreover, analysts are optimistic about the company's profitability, predicting a profitable year ahead.
InvestingPro Tips further highlight the stock's recent volatility, with the share price experiencing a notable decline over the past week. However, this could be an opportunity for investors to consider Accent Group's stock at a potentially undervalued price point. Interested investors can find additional insights and tips on Accent Group Ltd., including 7 more tips that could help inform investment decisions, at InvestingPro's dedicated page for the company.
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