If had to pick one ASX share investment to invest $1,000 in, I'd go for Lovisa Holdings Ltd (ASX: LOV) shares.
No one knows what the next day, week, month or year will have in store for the ASX share market. But I think (at least) a 3-year investment timeframe would be good to keep in mind for this stock, particularly because we don't know what's going to happen with inflation and interest rates.
There are a number of things that I like to look for – international growth plans, a good valuation, dividends and a good balance sheet.
So, I'll run through each of those factors for the affordable jewellery business.
International growth
At the end of FY23, it had 168 stores in Australia, which has a population of around 26.5 million people, according to the ABS.
There are plenty of countries that Lovisa has entered where the ratio of population to stores offers a lot of growth potential compared to Australia.
For example, at the end of FY23, Malaysia had 41 stores, Hong Kong had eight stores, Taiwan had one store, the UK had 44 stores, Spain had one store, Germany had 47 stores, the Netherlands had seven stores, Austria had seven stores, Poland had 18 stores, Italy had seven stores, Romana had one store, the USA had 190 stores, Canada had seven stores and Mexico had four stores.
With just the countries I mentioned, I think there's potential for Lovisa to grow its store network by at least five times. We've also heard that Lovisa is about to grow into mainland China, which would be a huge market for potential growth for the company.
With how low cost the ASX share's products are to produce, and how profitable the stores can be, I think it makes a lot of sense for Lovisa to grow its store network into as many cities as it can.
A good valuation
If we look at the Lovisa share price over the last 12 months, it's close to its 52-week low. The jewellery business has fallen almost 30% since April 2023, and it's down 14% in September.
When profit is going up while the Lovisa share price is going down, it's definitely making the investment seem more attractive as it reduces the price/earnings (P/E) ratio.
In FY23, Lovisa's net profit after tax (NPAT) improved 16.7% to $68.2 million despite all of the growth investing that the ASX share did during the period. Total sales increased 30% over the year to $596.5 million.
I think the current P/E ratio makes it seem like a good bargain considering how much the store count and profit could grow over the next three, five and ten years.
Commsec projections suggest that the current Lovisa share price is valued at 25 times FY24's estimated earnings and under 20 times FY25's estimated earnings.
Dividends
I recently wrote about why I like to see my own ASX shares pay dividends.
If we own dividend-paying shares, we don't need to sell down our holding to access returns, it can unlock franking credits, it avoids capital tax gains events, it allows me to focus on the long-term and I don't need to sell during a market decline.
The ASX share has paid a dividend each year since it first started paying one in 2015 and the dividend has grown significantly since then. In FY23 it paid an annual dividend per share of 69 cents.
By FY25, it's projected to pay an annual dividend per share of 82 cents, according to Commsec. That would be a partially franked dividend yield of 4.25%, or roughly 5.5% grossed-up at the same franking level as the FY23 final dividend.
Balance sheet
Ideally, an ASX share would have no debt and a large cash balance, to make them resilient during downturns.
At the end of FY23, Lovisa had net debt of $33.4 million. Considering it made operating cash flow of $188 million in FY23 (which grew 24.8% last financial year), it'd easily be able to pay that debt down quickly if it wanted to.
I'm confident that Lovisa has enough financial firepower and cash flow to deliver on its growth ambitions, which can then help the Lovisa share price.
