Is this recovering company still too cheap to ignore?

This firm is reporting a year of robust performance and strategic delivery, and it’s cheap.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The market likes today’s full-year results release from Epwin Group (LSE: EPWN), which is one of the UK’s largest manufacturers of PVC windows, doors and fascia systems. The share price is up more than 6% as I write, close to 78p.

The first things to strike me when looking at the share is that the valuation looks low. The price-to-earnings ratio for 2019 sits close to 7.5 and the forward-looking dividend yield is just over 6.8%. Why might that be?

The firm has had its problems

Well, I reckon the company operates in a highly cyclical sector and many cyclicals have low valuations after a long period of high profits because the stock market fears the next downturn in business. The firm also has a low market capitalisation around £105m and, generally speaking, small-cap companies attract a lower valuation than many larger names. I think that could be because investors perceive smaller companies to be riskier than large ones.

But those factors don’t tell the whole story with regard to Epwin’s valuation. Delving into today’s figures suggests the firm has endured some particular challenges that could have driven the valuation down. Indeed, revenue during 2018 came in 4% below that achieved the year before, underlying operating profit plunged 23%, the underlying operating margin slid by 19% to just 6.7%, and earnings per share rolled back by 7%. At first glance, there’s something to worry about here.

However, the report trumpets the headline, “A year of robust performance and strategic delivery,” so what’s going on? You don’t have to read far to find the root cause of the company’s problems. Epwin lost its two largest customers during 2017, which has knocked more than £27m from the revenue figure reported today. There was also a hit to revenue of just over £7m because the firm closed down its plant in Cardiff. Those things took the operating profit down too, but profits were also affected by “some unrecovered material cost inflation.”

Turning itself around

The loss of major customers is a clear blow, but Epwin reckons it made “significant” progress getting out of lower margin and unprofitable activities during the period. The report also asserted that the firm enjoyed “strong” underlying growth in revenue and gains in market share in all the company’s “key” product areas. I think this rather upbeat message has encouraged the market today with shareholders looking for a turnaround in Epwin’s fortunes.

And the firm has been busy rationalising its operations and adjusting the set-up for the future. Chief executive Jon Bednall said in the report that the strategy of site consolidations and closures to “deliver a more focused and valuable business” is going well.  2019 is off to a good start, he said, and selling prices have been going up to counter the effects of rising input material prices.

Epwin’s cheap and is in full recovery mode, but it remains a cyclical outfit and a small-cap company. There’s both high upside potential and big downside risk with the share today, in my view. Over to you…

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.

Kevin Godbold has no position in any share mentioned. 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.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »