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

A male investor sits at his desk pondering at his laptop screen with a piece of paper in his hand.
Opinions

Where I'd invest in ASX shares ahead of the likely RBA rate cut

These stocks look too good to miss.

Read more »

Person pretends to types on laptop drawn in sand.
Opinions

I sold one of my oldest ASX 200 shares last week. Here's why

Why would I sell one of my longest-held stocks?

Read more »

Broker analysing the share price.
Materials Shares

Buy, hold, or sell? Broker's verdict on 3 ASX 200 materials shares

Materials was one of four market sectors that weakened in overall value in FY25.

Read more »

A person sitting at a desk smiling and looking at a computer.
Technology Shares

3 ASX 200 tech shares to buy in July: Experts

The ASX tech sector delivered outstanding returns for investors in FY25.

Read more »

A group of executives sit in front of computer screens in a darkened room while a colleague stands giving a presentation with a share price graphic lit up on the wall
Opinions

2 ASX 200 large-cap shares that this fundie is cashing in after phenomenal growth

Shaw and Partners portfolio manager James Gerrish says he knows this will be an 'unpopular call'.

Read more »

Woman and man calculating a dividend yield.
Opinions

Buy or bail? Fundie's verdict on 2 ASX 300 shares

Stuart Bromley of Medallion Financial Group provides his insights.

Read more »

A woman sits in a quiet home nook with her laptop computer and a notepad and pen on the table next to her as she smiles at information on the screen.
Opinions

2 top ASX passive income stocks to buy with $5,000 today

I think these leading ASX passive income shares will keep delivering market beating yields in FY 2026.

Read more »

A black cat waiting to pounce on a mouse.
Opinions

ASX All Ords gold share jumps 28% in 7 days – but fundie says don't hold on

Niv Dagan of Peak Asset Management has a sell rating on this ASX All Ords gold stock.

Read more »