Cheap stocks are becoming harder and harder to find in the FTSE 100 but at 13 times forward earnings and offering a 3.46% dividend yield, I reckon home improvement retailer Kingfisher (LSE: KGF) may be one. The reason the company’s shares are so cheap is troubles in France, its second largest market, and the company being in the midst of a five-year transformation programme that aims to increase annual profits by £500m by 2021.
This turnaround plan seeks to standardise back office functions such as IT systems and purchasing decisions across its five brands in 10 European countries. One example the company gives is that of the 393,000 different types of stock keeping units (SKUs) it sold in 2016, only 7,000 were sold by more than two of its brands across Europe. If management is able to rationalise SKU numbers to 200,000 as planned and coordinate bulk purchasing across all brands, it’s easy to understand why margins could see very substantial uplift.
There have been recent hiccups in the execution of this plan though, with the business recently experiencing disruptions in France due to merchandise reorganisation and the shift towards a unified IT system. But I believe that these are short-term problems that aren’t entirely unexpected when a company undergoes a transformation this large.
The other key for Kingfisher is to return its French outlets to positive sales growth as like-for-like sales (LFL) collapsed 5.5% year-on-year in Q1. The company is aware of the importance of this task and is rolling out an upgraded online store and new product ranges whose success or failure will be instrumental in the turnaround.
The good news is that the rest of the business is already sound, with LFL sales rising 3.5% in the UK and 0.7% in the rest of Europe. It’s still early days for the company’s transformation programme but if all goes well and the new management team can sort our French operations, I reckon Kingfisher could be a bargain at today’s valuation.
A green investing favourite
Another FTSE 100 stock that’s fallen out of favour but has solid turnaround prospects is industrial manufacturer Johnson Matthey (LSE: JMAT), whose shares trade at 13.7 times forward earnings. Investors have worried that the firm’s high-end emission control devices, which include catalytic convertors, could see falling demand if diesel vehicle sales slump following the Volkswagen emissions scandal.
But so far these fears are proving unfounded as underlying sales for the year to March rose 13% year-on-year at actual exchange rates and a respectable 3% at constant currency rates. And management is setting the stage for long-term growth by restructuring its divisional structure, a move that could see its non-core chemicals business sold off.
This move would free up considerable capital and also allow the firm to refocus on its core emissions control devices and battery projects. The future looks bright for each of these offerings as consumers and corporations pay greater attention to pollution and climate change. These changes will drive greater demand for the firm’s emissions devices as well as increasing sales of its batteries designed for electric vehicles.
With a reasonable valuation and great growth prospects, Johnson Matthey could be a great pick for long-term investors willing to put up with short-term volatility.
