Investors in Marshalls (LSE: MSLH) would have seen a 262% capital gain over five years when its share price hit a peak of 876p in early January. Dividends paid along the way would have inflated returns further. But for those who may have missed out, after the recent FTSE sell-off shares in Marshalls are now changing hands for around 680p.
On January 16, in a trading update, Marshalls’ board said it was confident of meeting expectations for the year ended December 2019. There should be no nasty surprises for investors in the full annual report which will be available in two days.
Since Marshalls is both increasing revenues and earnings at a clip, and paying sustainable dividends, it has the characteristics of both a growth and income stock. Stocks like these are not common, especially those in companies that can trace their origins back to 1890.
Rock solid
Supplying natural stone and concrete landscaping products may sound boring, but it has been a good business for Marshalls. Revenues increased by 8.18% on average over five years, from £359m in 2014 to £491m in 2018.
At the same time, operating margins fattened from 7% to 13% and return on equity also increased, coming in at over 20% in 2018. Earnings and dividends per share nearly tripled and doubled over five years, to 26.08p and 12p respectively in 2018.
Revenues have grown organically, by promoting older products and developing new ones, and with some bolt-on acquisitions. Acquiring companies has not jeopardised the health of the balance sheet. Profitability improvement has come by way of focusing on higher-value-added products, be they old or new.
Those expectations that the board is confident of meeting would see the trends over the last five years continue. The consensus among brokers is that earnings per share will rise to 28.6p in 2019, and again to 29.4p in 2020.
Home focus
The bulk of Marshalls’ operations and supply chains are UK-based. There is a manufacturing facility in Belgium, and sales offices in the US, China and Dubai. However, everything outside the UK accounts for just 5% of revenues.
This geographic footprint does not expose Marshalls to the supply-chain disruption we have seen as a result of the coronavirus outbreak. Border frictions between the EU and the UK won’t matter too much to Marshalls.
Marshalls’ revenues are exposed to the mood of the UK economy though. Still, there are a few things that should smooth out its revenues and earnings. It serves a mix of commercial, domestic and public markets. Beyond stone and concrete for landscaping, Marshalls supplies other things like street furniture and mineral products.
It should be noted that it excelled after the Brexit vote when business investment and growth was generally lacklustre. Marshalls’ management highlights the continued outperformance of the Construction Products Association’s growth figures as evidence of it bucking the trend. And there is always the option of trying to boost international sales if things turn sour at home.
Building for the future
I think buying shares in Marshalls now could pave the way for portfolio profits. Considering the growth that is expected, the discounted price is attractive, which should tempt growth investors. The dividend yield is a little under 2%, but dividends are well covered by earnings and expected to increase, which should entice income investors too.
