Up 16% in 10 days but I think this oversold ASX stock is still in deep bargain territory

This unloved stock could be a contender for a rebound.

| More on:
A woman sets flowers on a side table in a beautifully furnished bedroom.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The ASX stock Adairs Ltd (ASX: ADH) has seen a strong bounce in its share price. It's up 16% in 10 days, but I still believe it's undervalued.

Interestingly, if we look at the chart below, we can see that the Adairs share price is close to where it was in December 2019 – just before COVID.

Created with Highcharts 11.4.3Adairs PriceZoom1M3M6MYTD1Y5Y10YALL22 Oct 201922 Oct 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.com.au

I'm not expecting the Adairs share price to go above $4 any time soon, however I think it's still a medium-term cyclical opportunity.

ASX mining shares often go through cycles as the commodity price changes. I believe ASX discretionary shares like Adairs can also be opportunities when they hit a low point.

In 2023, I regularly wrote about how I viewed Adairs as a beaten-up opportunity. But I think Adairs shares can continue rising. There are a few reasons why I'm optimistic about this ASX stock's longer-term future.

Households and Adairs sales are still struggling

If I were to utilise a multi-year investment strategy with Adairs, I'd want to buy when retail conditions were weak and sell when conditions were strong.

In the first eight weeks of FY25, Adairs reported that group sales had declined 0.4%. Looking at the different brands, Adairs sales were up 0.2%, Focus on Furniture sales were down 0.1%, and Mocka sales were down 5.2%.

The ASX stock noted that Adairs promotional activity had been reduced, but the gross profit margin had increased by more than 300 basis points (3.00%). Mocka sales were down due to a 15.7% decline in New Zealand sales, while Australian sales were up 4.6%.

Adairs noted that customers remain "discerning and value-oriented, however newness and well-designed quality products continue to resonate across the three businesses."

If/when economic conditions improve, I expect there will be a sizeable uptick in sales for the company.

Increased scale and initiatives

Adairs has invested in optimising its store network. I think those benefits will flow and become apparent as the economy normalises.

In FY25 alone, it's targeting six new Adairs stores and three new Focus on Furniture stores. In the last few years, it has upsized some of its Adairs stores, which are significantly more profitable than smaller stores, as it allows Adairs to display more of its product range.

With the FY25 result, Adairs said:

The completion of a number of major projects in FY24, such as taking control of the NDC [national distribution centre] and re-platforming Mocka's website, enables management to focus more on new growth initiatives to drive like-for-like sales and future profitability.

Some of those initiatives include expanding its product ranges and allowing the Mocka business to trial new channel opportunities, including wholesale and shop-in-shop.

Low valuation creates large dividend yield

The Adairs share price could fall in the short term, but I'm suggesting it's attractive to buy and hold until strong retail conditions occur.

The broker UBS forecasts the ASX stock could generate earnings per share (EPS) of 25 cents per share in FY26 and pay a dividend per share of 18 cents. That means that, at the current Adairs share price, it could be valued at 9.3x FY26's estimated earnings, with a projected grossed-up (including franking credits) dividend yield of 11%.

I believe it's still very attractive.

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. The Motley Fool Australia has positions in and has recommended Adairs. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Opinions

Happy miner giving ok sign in front of a mine.
Opinions

Which ASX 200 stock offers 'material upside' amid continuing uncertainty over US tariffs?

Blackwattle Investment has identified one ASX 200 large-cap stock that is thriving on the uncertainty.

Read more »

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
Financial Shares

2 rising ASX financial shares with 'meaningful upside' still left: fundie

Financials outperformed every other sector in FY25, but there are still buying opportunities left, say these experts.

Read more »

A businessman hugs his computer and smiles.
Opinions

If I could only own one ASX 200 share for the rest of my life, it'd be this one

This is one stock I expect to own forever.

Read more »

Man ponders a receipt as he looks at his laptop.
Technology Shares

Brokers rerate 3 leading ASX 200 tech stocks

Experts reveal their ratings on the ASX 200 tech sector's three biggest companies.

Read more »

Person holding a blue chip.
Opinions

Buy alert! 2 ASX 200 blue-chip shares worth a look now: expert

Dylan Evans from Catapult Wealth has identified two blue-chip shares that he thinks are good buys today.

Read more »

Two happy woman on a couch looking at a tablet.
Opinions

Why I'm excited to see the results of these ASX 200 shares

These stocks could reveal very interesting insights.

Read more »

Young male investor smiling looking at laptop as the share price of ASX ETF CRYP goes higher today
Opinions

Why I just bought this 5.2%-yielding ASX dividend stock and plan to buy even more

This business is one of my favourites for dividends and total returns.

Read more »

A young female investor with brown curly hair and wearing a yellow top and glasses sits at her desk using her calculator to work out how much her ASX dividend shares will pay this year
Opinions

Why I'm still investing in ASX shares during tariff uncertainty

There are a few reasons why I plan to continue investing even during uncertainty.

Read more »