Card Factory’s share price has soared. Should I buy this stock now?

The Card Factory share price has soared around 80% over the last month. Edward Sheldon takes a look at the investment case.

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One UK stock that’s hot right now is Card Factory (LSE: CARD). Over the last month, its share price has risen about 80%. However, over the last year, it’s still down about 15%.

Is this a stock I should consider for my own portfolio? Let’s take a look at the investment case.

Card Factory: growth prospects

The first thing I always look at when analysing a stock is its long-term growth prospects. I like companies that have the potential to grow much larger over time.

Looking at Card Factory, I’ve some concerns about the long-term growth potential. The company says the UK greeting card market size is set to be stable at £1.3bn through to 2024. However, it also says the UK card market has seen a long-term trend of mild volume decline (between 1% and 2% per annum). Where’s the long-term growth going to come from here if the industry is struggling?

To be fair to Card Factory, the company did have a solid growth track record prior to Covid-19. Between FY2015 and FY2020, revenue grew from £353m to £452m. However, sales took a big hit last year due to the pandemic. Analysts expect revenue of £302m for the year ended 31 January 2021.

Financials

Digging deeper into the financials, there are things I like and things I don’t like about Card Factory.

One positive is the company’s been quite profitable in the past. Between FY2015 and FY2020, return on capital employed (ROCE) averaged 18.2%. That’s impressive.

The company also had a nice dividend track record prior to Covid-19. Between FY2015 and FY2019, it raised its dividend from 6.8p to 9.3p. The board decided not to pay a final dividend for FY2020, due to Covid-19 disruptions.

What concerns me, however, is the balance sheet and liquidity. The balance sheet looks weak, in my view. Not only was long-term debt significantly higher than equity at 31 July 2020 (£279m vs £204m) but there was also a huge chunk of goodwill (£314m) on the books.

Meanwhile, on 14 January, Card Factory issued a statement saying it expects to breach the terms of its loans. Since then, it’s advised that its banks have provided waivers in respect of anticipated covenant breaches through to 31 March. It’s also advised it’s working on a plan to refinance the company.

My colleague Roland Head believes this most likely means a share placing is on the way. I think he’s right. Therefore, the risk of buying Card Factory now is that the shares could get heavily diluted in a discounted fundraising.

Given that we don’t have any details about a potential fundraising right now, it’s impossible to really work out an accurate valuation for Card Factory.

My view on Card Factory shares

Weighing everything up, this isn’t a stock for me. I can’t see where the long-term growth is going to come from and it’s hard to put a valuation on the stock right now.

All things considered, I think there are much better UK shares I could buy for my portfolio today.

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.

Edward Sheldon has no position in any shares mentioned. The Motley Fool UK has recommended Card Factory. 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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