Tyman (LSE: TYMN) shares are up around 7% on the release of a trading update. Revenue and adjusted operating profit for the full year will likely be “in line with current market expectations.” And those expectations are for the figures to be above last year’s.
Lately, I’ve become used to stocks falling on the day a company releases trading news, but the market’s reaction to Tyman’s update suggests the outlook is better than investors anticipated.
A progressive dividend
The firm makes engineered door, window and access components to the construction industry serving markets across the world and, as such, operates in a cyclical sector. I reckon we can see evidence of this in recorded earnings, which shows setbacks have occurred in some years. However, the overall trajectory of profits appears to be up, and Tyman hasn’t missed a beat with the shareholder dividend. It’s risen a little each year and is set to come in more than 50% higher than it was five years ago.
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But, at first glance, the valuation looks low. Even after today’s move, and with the share price at 221p, the forward-looking earnings multiple for the current year is just over eight and the anticipated dividend yield a juicy-looking 5.6% or so.
It’s possible we could be seeing the beginning of a valuation re-rating upwards. However, the company has a big chunk of debt on the balance sheet. Comparing the Enterprise Value with last year’s operating profit throws up a more realistic multiple of just under 14, so I don’t see the valuation as particularly cheap.
And trading conditions have been “challenging.” The firm reveals in the update that European and UK markets have “weakened” since the half-year report on 25 July, and the North American market is broadly flat “with no clear signs yet of a return to higher activity levels.”
Recovery in the American operations
However, the troubled North American operation, AmesburyTruth, is making progress on resolving its operational issues at the Statesville facility. Tyman’s chief executive, Jo Hallas, said in the update both customer service levels and productivity are showing “an improving trend” in America.
It seems to me that as well as operating in a cyclical sector, Tyman has been growing its enterprise and there’s a consistent record of annual rises in revenue. Indeed, this year’s figures will likely come in better than last year’s because of contributions from acquisitions during 2018 and “the strength of the US dollar against sterling.”
If the valuation is being depressed because of worries about the economic outlook, we could see the shares resurge if fears of a slow-down fade. Meanwhile, the dividend could keep on coming as it has over the past few years. But if we do see a half-decent plunge in general economic activity around the world, Tyman’s debt could become a problem, especially if earnings and cash inflow plunge.
I like the look of Tyman, its chunky dividend and growth prospects, but I’d like it a lot more if it had lower borrowings. Having said that, perhaps when the outlook is a little uncertain, we can often pick up the best bargains in stocks. Your call!
