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Premier Investments Limited (ASX:PMV) shares sink lower on broker downgrade

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In morning trade the Premier Investments Limited (ASX: PMV) share price has continued its decline and has sunk further into the red.

At the time of writing the retail conglomerate’s shares are down 7.5% to $17.58.

Why are Premier Investments’ shares sinking lower?

This morning a note out of Deutsche Bank revealed that its analysts have downgraded Premier Investments’ shares to a hold rating from buy following the release of its full year results yesterday.

And while the broker has lifted the price target on its shares to $18.50 from $16.70, this was still below the last close price.

Although Deutsche is pleased with the way that management has stabilised the performance of its core brands and is delivering on its growth plans, it isn’t a fan of its valuation.

Based on the broker’s estimate of earnings per share of 84.1 cents in FY 2019, Premier Investments’ shares are currently changing hands at 21x earnings.

While I would happily pay this and more for its Smiggle and Peter Alexander brands, I think it is expensive when you factor in its struggling brands that are limiting its overall growth.

Could Smiggle be spun off?

Interestingly, the AFR believes that investing purely in the fast-growing Smiggle brand could be a possibility in the future and has tipped a potential spin-off.

The report suggested that the company’s latest expansion strategy for Smiggle could be the foundation for a demerger at a later date. I think this would make a lot of sense and have previously stated that this was a spin-off that I would like to see.

Though, ideally, I’d like to see the Peter Alexander brand bundled in there as well as I believe it also has the potential to expand significantly internationally.

But whether this happens, only time will tell. Until then I intend to stay clear of the company unless there is a major pullback in its share price.

In the meantime, I think fellow retailers Adairs Ltd (ASX: ADH) and Super Retail Group Ltd (ASX: SUL) would be better options.

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Returns as of 6th October 2020

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Premier Investments Limited. The Motley Fool Australia owns shares of Super Retail Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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