When I’m looking for stocks to add to my portfolio, I focus on companies benefiting from tailwinds in their respective industries. A great example is the FTSE 100 warehouse owner and operator Segro (LSE: SGRO).
FTSE 100 growth play
The pandemic has produced a step-change in the retail industry. Lockdowns closed non-essential retail stores, so consumers turned to e-commerce to meet their needs. This has forced retailers to adapt.
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Before the pandemic, most retailers had some form of online operation, but many were struggling to catch up to companies built for the e-commerce market.
The pandemic changed that. Companies needed an online presence to survive. Those that already had an online presence have had to increase capacity to meet rising demand.
All of this has ignited a race for space from retailers. Segro is the largest publicly-listed pure-play warehouse operator in the country. It can’t build warehouses fast enough.
According to the FTSE 100 company’s interim results for the six months to the end of June, it has 1.3m sqft of projects under construction, of which 75% have been pre-let. Ultra-low interest rates are helping the firm fund this growth.
Not only are customers snapping up its new projects, but they’re also willing to pay more for existing facilities. The company reported an average 12% uplift in rent for contracts renewed during the period.
The FTSE 100 company believes this trend is here to stay. “We believe that the long-term trend towards increased online shopping has been amplified and accelerated by the pandemic,” its interim results noted. “This has given a new impetus to demand for space,” the release added.
Race for space
This is why I’d invest £500 in the company today. While shares in the group have increased by around 30% over the past 12 months, it looks to me as if this growth is sustainable.
Adjusted profit before tax increased 19% in its fiscal first half. With existing customers happy to pay a double-digit increase in rents to keep their contracts, and a steady stream of new projects in the pipeline, I think there’s a high chance Segro’s double-digit earnings growth can continue.
That said, while the company is one of the biggest warehouse operators in the country, it’s not the only one. Vast sums of money are flowing into the sector and this competition could put downward pressure on rents. With construction costs also rising, Segro may find itself spending money on new projects that it can’t afford if rents fall.
Despite these risks, I’m encouraged by the company’s progress. It also seems as if the demand for its properties will continue to expand, as more of the retail industry moves online.
As such, I think the FTSE 100 could be a great post-covid economic recovery play to add to my portfolio.