Shares of commercial flooring firm James Halstead (LSE: JHD) are little changed after the company released its first-half results this morning. The fourth-largest stock on London’s junior AIM market, at a share price of 490p Halstead is valued at over £1bn.
Is this 102-year-old firm, which operates in a mundane industry, worth buying today? Or is another AIM stock in a more exciting sector a better bet?
Scores on the floors
It’s easy to see why Halstead’s results didn’t have investors falling over each other to buy the shares today. Revenue increased a modest 4.3% to £119.6m, while pre-tax profit nudged up a mere 0.8% to £23.2m. Earnings per share (EPS) edged down to 8.5p from 8.6p, as a result of slightly higher tax.
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The company said UK revenue declined by 7% and, while exports increased over 12%, this was largely down to weaker sterling. Growth at constant currency was 2.5%. Profit was dampened by upward price pressure on raw materials and overseas-sourced goods, with the firm’s operating margin dropping to 19.7% from 20.3%.
On the face of it, Halstead may not appear to be an attractive investment, because a trailing 12-month EPS of 16.9p gives a relatively high price-to-earnings (P/E) ratio of 29. However, I believe the stock is well worth buying for long-term investors.
Confidence
Halstead put the decline in UK revenue primarily down to de-stocking, which I don’t see persisting beyond the short term. Meanwhile, the international growth opportunity for the company is considerable.
Margins remain excellent, showing how well the business is managed, and the balance sheet is bombproof, with net cash of £51.6m. The board increased the interim dividend by 7.1%, giving a handy yield of 2.5%, and said that it’s “confident of progress through the year”.
Impressive growth
Pollster and data analytics specialist YouGov (LSE: YOU) released its half-year results on Monday. At a share price of 265p, the company is valued at £278m, making it another of the larger stocks on AIM.
YouGov reported more impressive growth than Halstead. Revenue of £51.4m was a 24% increase (8% at constant currency), while adjusted EPS increased 21%. The company trades on a trailing 12-month P/E of 27.6 — slightly lower than Halstead’s, but offset by a less generous dividend yield of 0.5%.
De-rating risk
On the face of it, with similar overall valuations, YouGov is the better buy, because of its stronger growth. However, Halstead reports only statutory EPS, while YouGov highlights adjusted EPS. A big part of the adjusted EPS is effectively a fiction that the company never has any software and software development costs, whereas in reality these things are a significant and routine cash cost for the business.
While all’s going swimmingly with growth, the market seems happy to go along with the adjusted EPS number. My concern is that there could come a time when the market decides a number closer to statutory EPS is more appropriate for valuation.
YouGov’s shares having performed strongly over the last few years and the gap between adjusted EPS and statutory EPS is so large that, while the former gives a P/E of 27.6, the latter gives an eye-watering 75.7. I believe there’s a risk of YouGov de-rating significantly at some point and for this reason I rate the shares a ‘sell’.
