What would you pay for a carpet retailer?
OK, what am I missing here? Carpetright (LSE: CPR) ticks many of the boxes that might make it a good investment:
- Profit expected to increase? Check
- Experienced and competent management? Check.
- Efficient operation? Check.
- Dominant market position? Check.
- Bill Gates' investment company owning 5%? Check.
But unless I'm very much mistaken, it doesn't tick the most important box of all: value. Yes, it's a well-run business, and the founder and Chairman, Lord Harris of Peckham, has attempted to take it private in the past, but at 900p it's trading on a forward price/earnings ratio (P/E) of 32, and to me that just doesn't make sense.
Current trading
This morning's trading statement showed business better than many expected, with group sales for the 12 weeks to last Saturday up 10.3% on the same period last year, and like-for-like sales in UK up 5.6%.
The statement by Lord Harris was appropriately restrained: "We expect to deliver a half year profit performance ahead of expectations and, whilst we remain cautious about the retail market in the balance of the financial year, we have made a solid start."
People are a certainly a lot more positive than they were a year ago, and house prices have either reached the bottom or taken a pause, depending on your viewpoint, so home improvement has not come to a standstill.
Back to the price
And obviously I was wrong to think that it might. I did take advantage of the crash to pick up some bargains, but shares related to consumer discretionary items, like carpets, were definitely not on my shopping list. I wouldn't have touched Carpetright with a barge-pole back in December, when it was trading as low as 311p, and with hindsight that was a mistake.
Carpetright appears to be gaining from the demise of weaker competitors, such as Allied Carpets, but even if it really is onwards and upwards for the economy from here, does it warrant a valuation more appropriate to a high-growth tech business? Remember, even at their peak, earnings per share at Carpetright were only double the forecast figures for this year. Exactly what are people expecting the company to deliver (well, apart from carpets, obviously)?
Carpetright is very good at selling carpets and beds, but unless it's got some clever people in the back room working on cold fusion, I don't see how a price of 900p is justified.
But like I said, I may be missing something, just like I was last December.
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