One double bagger I’d sell to buy this FTSE 100 star

Roland Head highlights a FTSE 100 (INDEXFTSE:UKX) stock which may offer hidden value.

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FTSE 250 firm Coats Group (LSE: COA) is a company I hadn’t heard of until around a year ago, when it began a rapid turnaround that’s seen its shares double in less than one year.

The group is one of the world’s largest industrial thread manufacturers, producing threads for use in products such as clothing, footwear, furniture and the automotive industry.

It announced another acquisition today, aimed at expanding its range of specialist products. Patrick Yarn Mill specialises in cut-resistant and flame-retardant yarns and generated sales of $36.5m in 2016. Coats will pay $21-25m to acquire the business, dependent on its performance over the next three years.

Buy, sell or hold

I own shares of Coats myself. They’ve been a profitable investment for me over the last eight months. But I think the strong trading and pension settlement which drove the stock’s rapid gains may now be reflected in the group’s share price.

Looking ahead, analysts expect the group to report earnings of 6.2 US cents per share for 2017, a 26% increase on 2016. However, expectations for 2018 are more modest, with City brokers pencilling in earnings growth of just 7.5%. Although acquisitions like today’s deal may help to nudge this total higher, it seems to me that Coats’ growth is now likely to be slow and steady, rather than fast and furious.

With this in mind, I think the stock’s 2018 forecast P/E of 17.2 may be high enough. Next year’s dividend is only expected to provide a yield of 1.7%, well below the 2.7% average for the FTSE 250.

Holding onto this stock could still make sense for committed long-term growth investors, but personally I’m starting to think about taking profits in order to invest in more attractive opportunities elsewhere.

One miner I might buy

Copper mining group Antofagasta (LSE: ANTO) hit a 52-week high of 1,071p earlier this year. But the stock has pulled back by around 10% to just over 900p. In my view this could be an opportunity to buy shares in this Chile-based miner.

Before the mining market crashed in 2015, Antofagasta generated operating margins in excess of 30%. The firm’s mining costs were relatively low and it generated a lot of surplus cash. Although margins fell sharply in 2015, they are already recovering. Over the last 12 months, the group has achieved an operating margin of 19%. I think that further gains are likely over the next year.

Perfect timing

Antofagasta’s historically high margins and strong cash generation enabled the group to make a major acquisition during the mining downturn. Although this deal left the group with net debt of more than $1bn, this has already fallen to around $850m. This looks pretty insignificant to me, given that the firm is expected to report an after-tax profit of $647m for 2017.

The price of copper has risen by around 14% over the last year. Demand is expected to remain strong in the future for this relatively scarce asset.

As the benefits from Antofagasta’s expanding mine assets feed through to the firm’s earnings, I expect significant dividend growth. Trading on a forecast P/E of 17 with a prospective yield of 2.3%, I think the stock offers decent value.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of Coats Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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