In general, the UK stock market has recovered strongly from the pandemic headwinds. The FTSE 100 is up 45% from its Covid-19 lows and the FTSE 250 is up 35%.
By contrast, Forterra (LSE:FORT) shares are down 15% this year, putting them roughly where they were in the depths of the pandemic. Put simply, I think this is an opportunity that’s too good to pass up.
Short-term challenges
Forterra is the UK’s largest brick manufacturing company. Its range includes the London Brick, which features in around 25% of the UK’s housing stock.
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By itself, this goes some way to explaining why the stock has been faring so badly lately. Demand for bricks has been falling as the UK property sector faces serious headwinds.
Nonetheless, I’m buying the stock right now for two reasons. The company is in a stronger position than it was during the pandemic and its shares are close to their 2020 lows.
In fact, I’d go further than this. In my view, the business has never been in better shape and its share price hasn’t been this low since immediately after its IPO in 2016.
Post-pandemic improvements
Low interest rates in the UK have meant the last few years have been good for the business. And as well as paying significant dividends, Forterra has been investing in its future.
Earlier this year, the company opened its new factory at Desford. This is, according to its website, the biggest and most efficient brick manufacturing facility in Europe.
Arguably, this comes at an unfortunate time. Slowing demand for bricks this year means the company has had to mothball its facility at Howley Park.
Nonetheless, I think there’s a clear improvement in the business here. With expanded scale and greater efficiency, Forterra is in a stronger position than ever before.
That’s why I see this as a once-in-a-lifetime opportunity. The stock has been at this price before, but the underlying business wasn’t as strong.
Specifically, Forterra’s manufacturing capacity is the best its ever been. This means the value proposition for investors has never been better than it is right now.
Resilience?
There are headwinds in the near future though. But it looks to me as though the stock market is overestimating the significance of these.
What investors are missing, in my view, is that higher interest rates are likely to weigh on supply in the housing market as well as demand. Higher rates make moving house difficult.
Anyone thinking of selling their house to buy another is likely to find repayments on their new mortgage unattractive. And anyone looking to sell outright is going to find prices low.
I therefore don’t think many people are going to sell their homes unless they have to. And this should lead to some scope in the market for new buildings such as extensions, which will need bricks.
A stock to buy
The next year or so might be a challenge for the company. But a price-to-earnings (P/E) ratio of six reflects this.
After that, I’m hoping for big returns as a shareholder. As profits rise, I expect some combination of dividends, share buybacks, and share price increases to make this a great investment.
