It has been a very tough year for Burberry (LSE:BRBY). The FTSE 250 company is down 51% over the past year. It recently hit its lowest level in well over a decade. Yet numerous media outlets have been reporting the potential of the company getting bought out. This has caused a short-term spike in the stock. Here’s what I think happens next.
What we know so far
Let’s first run over what we know so far. Several reports have surfaced in recent days that Bernard Arnault, the head of the powerful LVMH Moët Hennessy Louis Vuitton empire, is interested in buying Burberry. This could come indirectly via outerwear firm Moncler, which has close ties to LVMH.
It appears buyers are circling due to the steep fall in valuation of Burberry, triggered by the share price fall in 2024. Investors have been staying clear of the stock following poor earnings reports, a change of CEO and the recent demotion to the FTSE 250. This has pushed the market cap down to £2.92bn. In contrast, LVMH has a market cap of £255bn!
In the same way that I might look at a stock and buy it because I think it’s undervalued, large corporations can do the same. Firms get bought out often because the other company thinks it’s good value at that point in time.
Weighing it up
I should note that nothing formal in the way of an offer has been received by Burberry (to the best of my knowledge). The spike in the share price recently is simply due to speculators making assumptions. If any deal is struck, it will likely be at a premium to the current share price. So for people that buy now and make the correct call, it’s a potential way to make some fast profit.
There’s nothing wrong with this, but it’s not really something I’m in the business of doing. If it turns out to be nothing there, I think the Burberry share price could fall further. Even though I think there will be a time where I want to buy the stock, it’s not right now.
I think it’ll take time for the business to get back on its feet. The cost cutting measures announced earlier this summer should help. Sales in the key Asia Pacific region should rebound next year thanks to Chinese stimulus efforts and regional growth. But these are things that take time to filter down to the bottom line for profitability. Therefore, I want to keep my powder dry for the moment.
Investment strategy
If Burberry does get bought out by the end of the year, I’ll tip my hat to those that bought the stock in anticipation of it. But as a long-term investor, it just doesn’t suit my style. Therefore, I’m staying away from this one for the moment, but will keep a close eye on reports.
This post was originally published on Motley Fool
