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I continue to think that there are very good stocks in the flagship FTSE 100 the index is cheaper than it should be, based on the long-term prospects of the business.
Here is one such share that I think investors should consider buying.
Discount seller, discount price
The FTSE 100 business in question is B&M (LSE: BME).
Currently, it trades at a price-to-earnings ratio (P/E) of less than 11. That’s cheaper than it used to be many years ago.
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So, what happened? In part a low P/E ratio indicates a decline in share price. B&M this week hit the lowest price it has traded in several years.
The profit after tax last year was not the highest, but it surpassed several previous years. Basic earnings per share also increased from the prior year.
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The retailer’s most recent sales update, in July, showed sales growth in the first quarter compared to the same period last year (at constant exchange rates).
Why did the stock price go down?
When you look at all that, what happens?
B&M is well established, expanding its retail footprint in the UK and France and its discount offering means that weak economic performance may improve rather than damage its appeal to consumers.
Another possible clue is the detailed breakdown of the trading statement. While the company saw overall sales growth in the quarter under review, the UK branded B&M business fell by 3.5%. If that’s a harbinger of a worse performance all year, it might help explain why City is nervous.
With interim results due this month, we will soon find out how the FTSE 100 business has been performing.
However, even if the UK B&M business shows a decline this year, does that justify it? 31% fall seen in the share price so far this year?
This seems extreme to me
I do not think so.
The UK retail market is highly competitive and that is an ever-present risk for B&M. But it has strong profitability, has a proven business model, is expanding its store footprint to increase economies of scale and offers a 3.8% cash yield.
The company averaged more than £1m a day in profits after tax last year but currently controls a market capitalization of less than £4bn.
With investor sentiment for the FTSE 100 share apparently lukewarm I think it could fall further from here.
But as a long-term investor, I think it looks very small compared to how I expect the business to perform over the next five to ten years.
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