The Halfords (LSE: HFD) share price is down by 10% over the past month. But the stock is still up over 35% in 2021 so far and has increased by more than 145% during the last 12 months.
Clearly there has been some profit taking recently after it reported its full-year results in June. I first covered the stock in April and was bullish then. I still am. I’d buy the stock today, especially as it’s trading with a price-to-earnings (P/E) ratio of 9x. This cheap valuation is too low for me to ignore.
In a nutshell, the results last month were strong. Halfords posted a rise in full-year revenue and profits as it benefited from the boom in cycling products and motor service sales. Underlying profit before tax soared (post-IFRS 16) by 184.1% to £64.5m and total revenue jumped 13% to £1.3bn. These numbers are very impressive.
What I also like about the firm is that it’s in a strong financial position. The balance sheet is in a good state and it finished the financial year with net cash of £58.1m. What this means is that it has the flexibility to invest and grow for the future. This should boost the Halfords share price going forward.
What caught my eye was how it reinstated the dividend. It’s worth noting here that many companies either cut or suspended their income payments in order to preserve cash during the pandemic. So the fact that the company is doing this is certainty a good sign and means that it can afford it.
Halfords proposed a final 5p income payment for its 2021 financial year. It also expects to deliver a full-year dividend of 9p in 2022 and profit before tax (post-IFRS 16) of above £75m. This upgrade in profitability forecasts is encouraging and is an indication that Halfords expects the good times to roll on into its next financial year.
Momentum has so far continued. The firm has seem a strong demand for motoring services, and cycling products. Its touring categories are performing well given the trends towards staycations this holiday season.
I reckon investment in the transition to electric vehicles should boost the Halfords share price too. Most investors know that economies are focusing on a green and sustainable future. So Halfords is investing in the electric boom.
Its aim is to become the leader in electric mobility services and I think it can get there. It’s training its store and garage staff on how to service the next generation of cars, bikes and scooters. And by the end of 2022, more than 2,000 of its employees will be trained in this field.
Of course there are risks. There’s no guarantee that the 9p dividend will be paid or it will meet its profit target in 2022. And if the demand for staycations and cycling products tapers off after Covid-19 restrictions are lifted. This could have a negative impact on the Halfords share price.
But I’m confident that the company is taking the right steps. Hence I’d buy the stock.