Sunday share tips: Dr Martens, Ricardo

by | Apr 18, 2021

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The Sunday Times’s Sam Chambers advised readers to “avoid” shares of Dr Martens, cautioning of the potential long-term pitfalls of its current focus on profitability.

Its shares had jumped by a third since its flotation at the start of 2021, reflecting the near doubling in underlying earnings for the year to March 2020.

Meanwhile, rapid vaccine rollouts in the US and UK – its two biggest markets – had helped to prop up sales and the company’s boss was now intent on growth in the Asian market.

Even better perhaps, the firm had the advantage of its own distribution network, with 130 stores and website.

According to Dr Martens, that was the key behind its 27% margins at the earnings before interest, taxes, depreciation and amortisation level.

And now the company was aiming was to raise those margins to 60% or more.

But a significant minority of users was now complaining of shoddy quality.

Add to that the fact that its private equity backer, Permira, would be able to start selling down its stake starting from July and the conclusion was that the stock was best avoided, the tipster said.

“Brands that focus on short-term profits tend to store up long-term problems.”

The Financial Mail on Sunday’s Midas column thinks that Ricardo shares are a ‘buy’, pointing to signs of a turnaround in its main drivers, with a view both to the short-term as well as the long-term, to back up its investment thesis.

Ricardo was hard hit by the pandemic because of its exposure to the auto industry, which accounted for 30% of its topline.

There were however already signs of a recovery in that sector in December.

Furthermore, a recent $90m contract to improve 10,000 of the US Army’s ‘Hummer’ infantry fighting vehicles was a testament to the company’s engineering prowess.

Looking out to the medium to long-term, the firm had already positioned itself as an environmental consultant to help governments and companies decarbonise their operations and products.

On the purely financial side of things meanwhile, at one point during the pandemic, Ricardo cancelled its final dividend, but later reinstated it and analysts expect the dividend payout to surpass its pre-pandemic level by 2022.

“At the beginning of last year, Ricardo shares were almost £8. Today, they are £4.35. The slump does not reflect this company’s prospects.

“In the short term, Ricardo stands to gain from a recovery in car sales. In the long term, the business is neatly positioned to benefit as countries and companies work out how best to reduce their carbon footprint. Buy.”

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