With an activist on board, is it time to buy Dr. Martens shares?


Chalkboard representation of risk versus reward on a pair of scales

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Shares in Dr. Martens (LSE:DOCS) have been falling since they first appeared on UK exchanges in 2021. Today, the stock is on sale at a 66% discount to its IPO price.

The underlying business has had its problems, but it also has a lot of attractive attributes. And these have been drawing the attention of an activist investor, which might just help unlock some value for shareholders.

Brand power

One of the company’s most important assets is its brand. This is something investors place a high value on.

A strong brand allows a company to do more with less. Coca-Cola (one of Warren Buffett’s most successful investments) is a great example of this.

Coca-Cola generates $12bn in income using $9.8bn in fixed assets – a return of 122%. But Dr. Martens is right there with them, with a 108% annual return.

Activist buybacks

There’s clearly something of value here. But this isn’t being reflected in the share price, which is why the stock has been attracting the attention of activist investment funds.

Sparta Capital, led by Franck Tuil, has been building a stake in the FTSE 250 laggard. It thinks the company could be run in ways that would unlock this value for shareholders

One way of doing this is through share buybacks. Repurchasing shares reduces the number outstanding and boosts earnings per share.

This is especially the case when a stock is trading at a low price. And this is the case with Dr. Martens shares. 

Management currently has authorisation to use £50m for share buybacks. At today’s prices, that implies a 3% return.

I’ve heard it speculated that the buyback programme is the result of Sparta Capital’s involvement. But either way, it looks very positive to me for shareholders.

Risks

The stock is currently trading at a price-to-earnings (P/E) ratio of around 12, which is fairly cheap. But it’s also a sign investors don’t have confidence in the business.

The company has had a number of problems recently. Most of these have come from its attempt to shift to direct-to-consumer sales, rather than wholesale distribution.

Inventory issues at its distribution centre in Los Angeles have created problems and the change in strategy has proved expensive. This has been a headwind for margins and profits.

On top of this, household budgets are under pressure at the moment. That’s been weighing on demand for a number of companies, and Dr. Martens is no different.

A stock to buy?

Dr. Martens is working through a number of issues, some of which are of its own making. But good companies can go through difficult times and still turn out well.

I think that might be the case here. Activist involvement might hurry the process along, but I think the firm’s intangible assets look attractive to me at today’s prices even without the potential catalyst.

As a result, I’m seriously considering adding the stock to my portfolio. I don’t think I need to be in a rush, but I do see this as a stock to buy.



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