With the housing market cooling and many household budgets tightening, demand for home improvement products could suffer in coming years. That might be bad news for builders’ merchants such as Travis Perkins (LSE: TPK). Still, with a price-to-earnings (P/E) ratio below six, the business looks like a possible bargain for my portfolio. That is why, if I had spare money to invest, I would take advantage of today’s Travis Perkins share price. I am optimistic it could rise in future.
Resilient business performance
Despite a worsening economic backdrop, so far I think the business performance shows resilience.
Last month it updated the stock market on its performance in the third quarter. Total sales grew 10.7% compared to the same period the prior year, with like-for-like sales growth coming in at 7.4%.
The Toolstation division returned to growth and its European business reported sales 23.3% above the same quarter last year. That suggests there is strong future expansion potential for that part of the business.
I do think the recession could hurt spending on building materials and perhaps Travis Perkins’ sales and profits. So far though, there is little if any evidence of that happening. Longer term, I think the business has some real strengths that could help it thrive. It has a well-established branch network and established customer base. Its brands are strong and can help it expand into new markets, as seen at Toolstation.
The company has been focused on cost discipline. That could help it maintain profit margins even as cost inflation grows. Doing that is important as the company has already seen margins slip. In the first half, the adjusted operating margin fell to 7.9% from 8.2% in the same period a year ago.
Why has the share price tumbled?
In the past year, the share price has fallen 44%. Clearly some investors perceive risks given growing weakness in the housing market. But for a business with long-term strengths that continues to perform well, is that fall justified?
I do not think so. The company’s P/E ratio now looks very cheap to me. I may not be the only investor thinking this way, it seems. Since the last week of September, the share price has put on 19%.
That could mean it has reached a turning point as investors reassess the business and its valuation. I think the shares may keep rising from here. The underlying business is in good health, trading is strong and the valuation looks cheap.
The £902m of net debt reported by the company in its interim results is higher than I would like to see. If servicing that eats into cash flows, there could be a risk to the dividend. For now, though, the dividend yield of 4.4% is attractive to me.
I’d buy!
I like the long-term story here. I see a mismatch between it and the current share price.
So if I had money to invest today, I would buy these shares for my portfolio.
