Why I think this ASX 200 stock is a top buy right now

I'm bullish about this stock with global potential.

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The S&P/ASX 200 Index (ASX: XJO) stock Premier Investments Limited (ASX: PMV) looks to me like one of the ASX's most compelling share ideas worth $5 billion or more.

Many exciting companies on the ASX have rallied this year, making them more expensive. But Premier Investments, the owner of Smiggle, Peter Alexander, and several other retail brands, is in a different situation.

The Premier Investments share price has dropped more than 10% since early September 2024, as we can see in the chart below.

Created with Highcharts 11.4.3Premier Investments PriceZoom1M3M6MYTD1Y5Y10YALL27 Oct 202328 Oct 2024Zoom ▾Nov '23Jan '24Mar '24May '24Jul '24Sep '24Jan '24Jan '24Apr '24Apr '24Jul '24Jul '24Oct '24Oct '24www.fool.com.au

Following this sell-off, I think now is a good time to invest in the ASX retail share for several reasons.

Lower valuation

When a company is sold, we can buy shares at a lower price/earnings (P/E) ratio. That's usually good for a business's growth over the long term.

This ASX 200 stock owns several apparel retailers, including Just Jeans, Jay Jays, Portmans, Dotti, Jacqui E, Smiggle, and Peter Alexander. It also has large stakes in Breville Group Ltd (ASX: BRG) and Myer Holdings Ltd (ASX: MYR). Collectively, these businesses have grown profit significantly for Premier Investments in the past decade.

Broker UBS thinks Premier Investments could deliver a net profit of $258 million in FY25. In subsequent years, the broker predicts its net profit could rise every year until FY29 when it could reach $344 million. That suggests profit could rise 33% between FY25 and FY29.

At the current Premier Investments share price, it's trading at approximately 19x FY25's estimated earnings.

Demerger plans

The business is working on plans to unlock shareholder value, which could increase the market's willingness to pay for the ASX 200 stock or its separate parts.

Initially, Premier Investments management was thinking about demerging Smiggle and/or Peter Alexander, but then Myer came forward with an interesting offer.

Myer has proposed combining with Premier Investments' apparel businesses of Just Jeans, Jay Jays, Portmans, Jacqui E, and Dotti. For this transaction, Myer would issue new shares to Premier Investments, contributing in proportion to their "maintainable EBIT" (meaning operating profit). Premier Investments would then distribute all of its Myer shares to Premier shareholders.

Myer believes this transaction has the potential to significantly increase Myer's scale and market position, deliver synergies and drive sustainable earnings growth.

If that transaction goes ahead, it would increase Myer's value while leaving the Premier Investments business with higher-quality operations, in my view.

And I think the global earnings growth potential of the remaining businesses is exciting.

Global growth

Both Smiggle and Peter Alexander have ambitions to grow their worldwide presence, which should help increase earnings.

Smiggle already has more than 300 stores worldwide, in places like Australia, New Zealand, Asia, and Europe. Its net increase of eight stores during FY24 was significant, and it plans to expand further. It has identified opportunities for at least 10 new stores in existing markets in the near term.

Smiggle is also continuing to explore future offshore markets both as future 'owned stores' and the evolving wholesale channel.

Peter Alexander had 135 stores at the end of July 2024, and it achieved a net increase of eight stores in FY24. Peter Alexander has identified at least 20 opportunities for new and/or larger format stores in the near future in existing stores.

Peter Alexander is also looking at international market opportunities, including a launch into the United Kingdom in November 2024, with three stores in London. The UK population is more than double that of Australia and New Zealand, so it's an exciting market that could help drive the ASX 200 stock.

Should you invest $1,000 in Premier Investments Limited right now?

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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 no position in any of the stocks mentioned. The Motley Fool Australia has recommended Premier Investments. 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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