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There are some bargains to be found among UK domestic-focused stocks if you believe the economy won’t deteriorate sharply in 2017.
One company that’s caught our eye is FTSE 250 kitchens seller Howden Joinery (HWDN). Its share price has fallen 28% since the Brexit vote in June 2016, yet it has an excellent track record of managing costs in more difficult economic times in order to protect profits.
It has a very strong balance sheet with £182.7m net cash position as of June 2016 which was the last set of reported accounts.
Howden only sells to trade customers via a network of 600+ depots in the UK. In 2015 it supplied more than 400,000 kitchens, 2.4m doors and 750,000 appliances to UK homes.
Why the shares are down
Investors fear the Brexit process could weaken consumer confidence and hurt the property market. Fewer house sales could dampen one of the biggest catalysts for getting a new kitchen.
The sharp drop in sterling also has a negative impact on Howden. Investment bank Liberum believes one third of Howden’s costs associated with making its products are priced in overseas currencies.
The weaker pound means these raw materials more expensive to buy, so Howden will need to raise its selling prices to recoup these extra costs.
In light of these issues, one could suggest the market has been right to discount its share price given the risks. We think the market is too pessimistic.
Similar businesses say trading is holding up
There were some positive signs from the builders’ merchant and broader construction sectors early in January 2017 which have positive read-across to Howden.
Paints-to-plumbing equipment retailer Grafton (GFTU) said sales growth had picked up in the last three months of 2016. Insulation products provider SIG (SHI) said trading had stabilised following problems last year. Brick maker Forterra (FORT) said sales volumes had increased in both November and December 2016.
A decline in the property market wouldn’t necessarily be completely bad news for Howden, should it happen. We believe families would think about doing up their property instead of moving.
Liberum believes Howden’s current share price weakness presents ‘an excellent opportunity’ to pick up shares in a market leading business. It also believes the company will keep growing its dividend despite the uncertain backdrop.
Achieving the forecast 11.2p per share payout in 2017 would mean Howden had delivered a 30.1% compound annual dividend growth over five years.
Howden Joinery (HWDN) 368.9p
Stop loss: None
Market value: £2.36bn
Forecast dividend yield 2017: 3%
This article is provided by Shares Magazine. Shares publishes information and ideas which are of interest to investors. It does not provide advice in relation to investments or any other financial matters and does not guarantee the accuracy or completeness of the information in this article.
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