Is this a once-in-a-lifetime opportunity to buy these bargain basement stocks?
Half year results for kitchen manufacturer Howdens Joinery (LSE: HWDN) released in July saw year-on-year revenue rise 9.5% and pre-tax profits jump a whopping 26%. Positive forward guidance from management also set the basis for a fifth straight year of earnings and dividend growth. Surely this means shares are rocketing.
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But, with fears mounting over the health of the housing market shares are instead down a full 31% since January. This means shares now trade at a positively bargain-basement forward price/earnings ratio of 12.7 with the added bonus of a healthy 2.9% yielding dividend. This is the cheapest shares have been since 2012, so is it a great time for investors to begin or enlarge an existing position?
Considerable room for growth
I think it may. One large reason is that Howdens is far and away the market leader in supplying kitchens for new homes. The company has no retail outlets and instead works solely with builders from 629 depots across the UK. And while the housing market may have shown some signs of slowing since the EU Referendum, demand for new homes still far exceeds supply. This is clear in the Exchequer's promise in his Autumn Statement to continue supporting home buying through tax breaks and a promised £3.7bn for new home construction. This will undoubtedly be a huge boon to Howdens in the coming years.
And, even without government support, Howdens still sees considerable room for growth in the UK. The company believes it has space to bring total depots to 800 in the coming years. Combined with expansion into France and surrounding Western European countries, there is significant growth potential for Howdens.
With net cash of £182m at the end of June, solid growth prospects and high margins, Howdens is looking like a steal to me at 12 times forward earnings.
Fear of a downturn
Television broadcaster ITV (LSE: ITV) is another cyclical that has been punished this year despite posting solid results. Shares are down almost 40% in 2016 and now trade at an astonishingly cheap 10 times forward earnings.
This poor share performance has come even though results for the year through September saw a 5% rise in revenue and positive annual profit guidance remain in place. The reason for the shares' dismal performance compared with the performance of the actual business is increased fear that an economic downturn is around the corner. This would, of course, mean less spending from advertisers and consequently less revenue for broadcasters.
But ITV management is well aware of this and has spent the past few years lessening the company's dependence on advertising revenue. It's done this by bulking up its in-house productions through organic growth and acquisitions. Consequently, the high-quality programmes it produces and sells to other broadcasters now account for around 40% of overall revenue.
As the demand for high-quality TV increases across the globe this segment has high growth potential. Now, if a recession occurred tomorrow it wouldn't be enough to stop group profits plunging, but that's a risk all investors take. And with net debt a very manageable 1x EBITDA and strong growth from the in-house studio, I think shares may be a bargain at 10 times forward earnings.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has recommended Howden Joinery Group and ITV. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
