Shareholders in builders’ merchant Travis Perkins (LSE: TPK) breathed a sigh of relief this morning after the firm reported a solid set of third-quarter results.
Like-for-like sales rose by 4.1% during the quarter, leaving the year-to-date figure unchanged at 4.2%. However, the news wasn’t all good. The DIY sector remains “very challenging for Wickes”, which is the group’s main consumer brand. Like-for-like consumer sales fell by 4.2% during the period.
The engine driving the group’s performance at the moment appears to be demand for plumbing and heating supplies. Like-for-like sales in this division have risen by 18.2% so far this year, and were 14.8% higher during the third quarter.
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What does it mean for shareholders?
The firm’s shares have already lost around one third of their value this year. Adjusted pre-tax profits fell by 4.6% to £157m during the first half after the firm said weak trading at Wickes had hit profits.
This is obviously a business that would suffer during a recession. But I am attracted to its strong portfolio of brands and significant scale — annual sales are over £6.6bn.
Travis Perkins’ shares now trade on a forward price/earnings ratio of 9.5, with a prospective yield of 4.7%. The dividend should be covered 2.3 times by adjusted earnings, giving some downside protection.
That’s a tempting valuation, but it seems likely to me that market conditions will remain tricky in the UK. This is likely to make life harder for Travis Perkins, so I don’t see any compelling reason to buy the shares today.
One stock I would buy
If you’re looking for companies you can safely buy and forget for 10 years, one stock I would consider is food-to-go retailer Greggs (LSE: GRG).
Whereas Travis Perkins has a lot of money tied up in depots, warehouses and inventory, Greggs does not. The difference shows. Both companies have operating margins between 5% and 8%, but Greggs generated an impressive return on capital employed last year of 23%. The equivalent figure for Travis Perkins was just 9%.
Greggs’ profitability is one of the reasons why I’m attracted to this well-run retailer. Chief executive Roger Whiteside has steadily expanded the group’s food offering in recent years, widening its customer base.
Coffee, pizza and healthy options are all on the menu these days, and the firm is experimenting with ways to capture evening trade as well as breakfast and lunch.
A more defensive choice
Greggs’ business is more cyclical than a supermarket. Trade could suffer during a recession. But the low cost of popular items suggests to me that many customers would still drop in for a snack if they were passing. I don’t think we’d see a serious collapse.
For now, trading remains strong. Third-quarter sales rose by 7.3% and the retail slump means that rents are falling on the group’s high-street units.
The shares aren’t cheap, trading on a 2018 forecast price/earnings ratio of 18. But the 2.8% yield should be covered by surplus cash and I’m attracted to the group’s proven profitability.
In my view, this business is an attractive pick for investors wanting exposure to UK consumers. I’d be happy to buy these shares today and tuck them away for a decade.
