Should I buy Halfords stock?

Will we see the e-boom falter, or has there been a permanent change in transport habits that will continue to drive sales and benefit Halfords stock?

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Man changing battery on electric bicycle

Image source: Getty Images

Historically, Halfords (LSE: HFD) has derived most of its income from garages, motor repairs and traditional bikes. However, its current high share price is a reflection of rocketing sales in e-transport. With Coronavirus restrictions about to end, will we see the e-boom falter, or has there been a permanent change in transport habits that will continue to drive sales and benefit Halfords stock?

Can Halfords stock continue to rise?

Our lives in lockdown have caused a renewed interest in bicycles, scooters, and all things foot powered. Halfords has some fairly rosy figures: annual profits are up 184%, while revenue rose 13% to £1.3bn in the year to 2nd April.

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The company reported a 54% leap in cycling sales, more than offsetting the 12% drop in motoring transactions. Sales of E-bikes and E-scooters also rose 94% in the same period.

Halfords stated “We have continued to lead the transition to an electric vehicle future by investing in training and technology. By the end of the current financial year, we will have trained more than 2,000 of our store and garage colleagues to service electric cars, bikes and scooters.”

Moreover, CEO Graham Stapleton is confident that sales will continue to increase due to the “pent-up” demand for bikes, and continued restrictions on holidays abroad. He believes that the long-term changes brought about by the pandemic will ensure that more people than ever continue to give up four wheels for two. In addition, he predicts pre-tax profit to exceed £75m in the current tax year, buoyed by a larger share of the market.

The headwinds that lie ahead

However, most brokers forecast that Halfords’ earnings will fall this year, so it remains to be seen whether the CEO or the brokers are right.

There are two major obstacles standing in Halfords’ way; first is the questionable legal status of E-scooters, which are driving its sales. E-Scooter start-ups are already struggling with legislative change. In the UK, E-Scooters are banned from public roads, pavements, and cycleways, and can only be used on private land. If the outcome of pilot schemes testing their use on public roads finds them to be unsafe, they could be banned from sale completely.

Halfords’ second obstacle is the weakness in the global supply chain, which could constrain the company’s ability to grow. Most bicycle parts are made in East Asia, due to the low cost of steel and cheap manual labour. However, these are both under pressure due to local lockdowns, limitations on shipping, and higher global demand.

The company has already warned investors that it faces an “acute” shortage over the next two quarters. Halfords may have no choice but to increase the cost of its bikes, but this could damage its public image as an affordable retailer and hurt sales considerably. However, it is important to note that these issues affect its competitors equally, and so any negative effect on Halfords’ stock price should not be too drastic.

The bottom line

Halfords shares closed on Monday at 402p, a 15% increase on its last stable price point at 350p in mid-June 2018. I predict that the stock will soon move back towards 350p as brokers expect. When this happens, a reliable 2% dividend, booming sales, and a strong household name could make Halfords a solid addition to my portfolio – something my Foolish colleague Royston Wild agrees with.

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Charles Archer does not own shares in Halfords. 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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