The Adairs share price has soared 20% in July. Why I think it’s still a buy

a young woman sits on a sofa in a stylish home with her laptop computer balanced on her knee and smiles with a satisfied look on her face at what she's seeing on the screen.

a young woman sits on a sofa in a stylish home with her laptop computer balanced on her knee and smiles with a satisfied look on her face at what she's seeing on the screen.

The Adairs Ltd (ASX: ADH) share price has been a strong performer in July with FY23 starting well for the ASX retail share.

But, despite the strong run-up of Adairs shares, I believe the company still offers good value.

The business that sells homewares and furniture has seen investor sentiment change. Even though it has recovered some of its lost ground in 2022, it’s still down by 43% this year.

After such a heavy decline, I think the business is now much better value.

Adairs share price valuation

FY22 was significantly impacted by COVID-19 lockdowns and store closures. Management said that this cost the business many millions at the earnings before interest and tax (EBIT) level.

However, there are profit estimates out there that still suggest Adairs is going to generate solid profit in FY23 and then grow in FY24.

Profit projections on CMC Markets suggest earnings per share (EPS) of 27.7 cents in FY23 and then 31.6 cents in FY24.

Using the current Adairs share price, that puts the business at eight times FY23’s estimated earnings and seven times FY24’s estimated earnings.

I think a price/earnings (p/e) ratio of under 10 for a business that has a good chance of growing earnings in the longer term makes it seem good value.

Great dividend

One of the benefits of a low p/e ratio is that it means the dividend yield can be quite high because the earnings multiple is low.

Dividends can form a sizeable part of the overall returns. If investors don’t recognise the attractiveness of the earnings potential, then the cash returns of the dividends can certainly make up for it.

CMC Markets has estimates for what the Adairs dividend may be in the next couple of financial years. In FY23, Adairs could pay an annual dividend of 17.5 cents per share and then, in FY24, it could pay a total dividend of 20.8 cents per share.

At the current Adairs share price, that translates into grossed-up dividend yields of 10.9% and 13% respectively. If those dividends are paid, the dividends alone would be pretty good returns.

I think earnings can grow

The next 12 months looks uncertain. Rising interest rates and inflation could certainly have an impact on the economy and Adairs’ earnings.

I’m not sure how much certainty we can get from trying to guess what the interest rate will go up to in the short term, when inflation will peak, and so on.

But, I think the heavy fall of the Adairs share price makes up for the uncertainty. After all, there’s usually something to be uncertain about.

Adairs says that its Focus on Furniture acquisition has attractive growth potential with a store roll-out, online growth, and expansion of its categories and ranges. There is also an opportunity for Adairs and Focus to leverage their skills and assets. In five years, Adairs is hoping this business can generate at least $250 million of sales.

With furniture business Mocka, Adairs wants to grow brand awareness, expand its range, and add a physical presence. For this, it can utilise its existing store networks.

Finally, with Adairs-branded stores, it can grow its total retail floor space with new and upsized stores. Adairs can also grow its membership numbers, grow its online sales, expand its range, and offer customers an even better service.

I think all of these factors could be helpful for the Adairs share price over time.

The post The Adairs share price has soared 20% in July. Why I think it’s still a buy appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended ADAIRS FPO. The Motley Fool Australia has positions in and has recommended ADAIRS FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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