Why I'm not even considering these growth shares just yet

The Motley Fool

After five years of tremendous share price growth, it seems like home furnishings retailer Dunelm(LSE: DNLM) has been taking a well-earned breather and going through a consolidation phase of late. Following its stock market debut in October 2006, the UK's leading home furnishings retailer saw its shares drift lower for two years, before embarking on a strong five-year rally that saw the share price rise by 700% to 1,047p by the summer of 2013. Since then it's been bouncing between 740p and 1,047p, with the share price currently at the lower end of the range. So what's going on, has the company stopped expanding?


Slower growth

Au contraire. The FTSE 250 retailer has grown both its sales and profits every single year since its IPO a decade ago, as it continues to open new stores throughout the country. What HAS changed is the pace of growth. The group currently operates 157 stores, and naturally the earnings from each new opening will contribute a smaller percentage to the company's overall bottom line.

The Leicester-based retailer achieved a 19% improvement in underlying earnings just four years ago for fiscal 2012, but this growth rate has slowly eroded, with September's full-year results showing a more modest 6% rise for FY2016. In my view this is the main reason why the market is no longer prepared to pay a premium for Dunelm, despite its continuing success.

Lower footfall

In its recent first quarter update the group reported a 3.8% decrease in like-for-like sales growth from its stores and home delivery service, blamed on unusually warm weather during the 13-week period ended 1 October, which had a dampening effect on store footfall. However, the retailer continued to see good growth in its online business, which included an impressive a 17.9% increase in home delivery sales.

I think we will continue to see the group outperform the homewares market as a whole, albeit with a slower rate of expansion. The shares are currently trading at a 20% discount to a year ago, but with the City anticipating little to no growth this year, I think Dunelm's forward P/E rating of 15 is about fair.

Favourable exchange

Another mid-cap firm whose shares have been drifting lower over the last couple of years is thermal processing services provider Bodycote(LSE: BOY). The Macclesfield-based firm last week issued a trading update for the four months ended 31 October, reporting an impressive-looking 12.7% rise in group revenue compared to the same period in 2015.

But in my opinion these figures flatter to deceive, as favourable exchange rates have helped to mask a 3.1% dip in revenues when viewed on a constant currency basis. Analysts aren't expecting too much from Bodycote this year, with consensus estimates suggesting a 7% dip in full-year earnings for 2016, leaving the shares trading on a reasonable P/E rating of 16. Again I can't see any compelling reason to buy at the moment.

DON'T miss this Top Growth Share...

If you're still looking to make serious capital gains from shares, then you'll want to read this FREE report from the experts at The Motley Fool, who've uncovered A Top Growth Share that's already delivered a 400% gain in the last four years.

To reveal the Top Growth Share simply CLICK HERE.

Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has recommended Bodycote. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.