2 screamingly cheap value shares for 2017

Howden Joinery
Howden Joinery

Shares of challenger bank Virgin Money (LSE: VM) are still 12% below their pre-Brexit high and now trade at exactly one times book value. This means investors are essentially pricing-in no future growth when valuing the company, which I reckon is a mistake that makes it an intriguing option in the banking industry.


It's understandable why investors are giving retail banks a wide berth, after all interest rates are at record lows, long-term consumer confidence isn't exactly stellar and the housing market is looking unsteady. That said, Virgin Money is strongly profitable, is quickly boosting margins through cost-cutting, and is taking market share from larger rivals at a steady clip.

The key to its success has been improving the health of the remnants of Northern Rock that it bought from the government in 2011. Cutting costs and selling off bad bits of these acquired assets has led to a rapid improvement in key performance indicators. For example, the bank's underlying cost-to-income ratio in H1 improved from 68.3% to 58.8% year-on-year and underlying return on tangible equity (RoTE) grew from 9.5% to 12.2% in the same period. And management is confident that further improvements can be made and is targeting a cost-to-income ratio of 50% and mid-teens RoTE in 2017.

Unsurprisingly, this progress has been great for the bottom line and statutory pre-tax profits rose from £55m in H1 2015 to £93.7m in H1 2016. This trend should continue in the future as improving RoTE is combined with a growing asset base. This is being driven by growth in credit card balances and mortgage lending, which rose 19% in the first nine months of 2016 to give Virgin 3.6% market share.

Virgin Money is definitely not for investors who believe the UK economy is about to implode. However, its healthy balance sheet, rapidly improving profitability, none of the legacy misconduct issues or high costs of larger competitors, and shares being priced for no growth make me incredibly interested in the company.

Another great company that has seen its share rocked by the EU Referendum vote is kitchen manufacturer Howden Joinery (LSE: HWDN). The company's share price is down nearly 25% from pre-vote levels, despite the fact that trading was unaffected and pre-tax profits are still expected to meet analyst expectations.

The upside is that falling share prices have made Howden shares look quite cheap at 13 times forward earnings. Despite Howden's health being tied to that of the housing sector, as it makes kitchens for builders, this is looking like an attractive valuation for long-term investors.

That's because Howden is growing quickly with 20 outlets added this year to make 639 in total, putting the medium-term target of 800 well within reach. Revenue growth is buttressed by very good operating margins that reached 14.1% in the first half of 2016. Rising revenue and margins equal higher profits and Howden isn't disappointing us with pre-tax profits rising to £74.8m in the period and a net cash position of £182m.

With steady expansion funded by retained earnings, management is returning much of this excess cash to shareholders. In just the first nine months of 2016 a whopping £80m was spent on share buybacks on top of a very solid 2.8% yielding dividend

But, if you prefer your income stocks to be less tied to the fate of the cyclical housing market, I recommend reading the Motley Fool's top analysts' free report on the company they've named their Top Income Share.

This under-the-radar income champion has raised dividends over 400% in just the past four years alone. And with dividend cover still very high at three times earnings, there's plenty of room for this trend to continue.

To read your free, no obligation copy of the report, simply follow this link.

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