Leading broker says Adairs (ASX:ADH) share price is a buy

Here’s why this leading broker is positive on Adairs…

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The Adairs Ltd (ASX: ADH) share price has been out of form in recent weeks despite the release of a strong full year result last month.

Since this time in August, the homewares and home furnishings retailer’s shares are down 9%.

Is the Adairs share price good value?

While the decline in the Adairs share price over the last few weeks has been disappointing, one leading broker believes it could be a buying opportunity.

According to a recent note out of Morgans, its analysts have upgraded the company’s shares to an add rating with a $4.20 price target.

Based on the current Adairs share price of $3.89, this implies potential upside of 8% over the next 12 months excluding dividends.

And with Morgans forecasting a fully franked 22 cents per share dividend in FY 2022, this potential return stretches to just over 13.5% including them.

What did Morgans say?

Morgans was very impressed with Adairs’ performance in FY 2021. And while the start of FY 2022 has been tough for the retailer because of lockdowns, it remains positive on the longer term. It also highlights that the Adairs share price is cheap in comparison to peers.

The broker said: “ADH’s early FY22 experience is in line with most retailers who have reported to date, as store closures impact in-store sales, partially offset by online growth. There remains a lot to like about this investment case: 80% of sales coming from loyal Linen Lover members; GLA growth via new stores and upsizing; DC cost efficiencies to flow from 2QFY22; and 37% of sales online (inflated in FY21 by lockdowns) combined with a highly profitable store network.”

“We upgrade to an Add rating (from Hold). Despite EPS revisions in FY22, ADH is one of the cheapest retailers in the sector (CY22F PE of <10x). ADH has a strong BS, loyal customer base and various growth options. There is of course a question mark over whether elevated GMs are sustainable long term, like most retailers. However, at this valuation, we see enough safety in the numbers,” it added.

Should you invest $1,000 in Adairs right now?

Before you consider Adairs, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Adairs wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of January 13th 2022

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended ADAIRS FPO. The Motley Fool Australia owns shares of and has recommended ADAIRS FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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