Why is the Grafton share price climbing? And should I buy?

The Grafton share price has climbed 85% in just two years, against the pandemic background. Is it a growth stock with even more to give?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

A colourful firework display

Image source: Getty Images.

Don’t you just hate it when a stock flies under your radar, and then you finally notice what’s happening and kick yourself for missing it? That happened to me Friday with Grafton Group (LSE: GFTU). I spotted its shares rising, up a couple of percent on the day, and took a closer look. And I see the Grafton share price has soared nearly 85% over the past two years.

So what is Grafton Group Units? The company supplies building materials and DIY products. And it seems they have been in big demand over the past year. That helped it to report a whopping 355% increase in adjusted earnings per share for the six months to 30 June 2021.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

Revenue grew by 46%, and improving margins helped to accelerate the bottom line even further. Adjusted operating profit more than trebled to £157.8m.

The company’s liquidity situation is made a bit tricky by IRFS 16 rules, which include lease liabilities under debts. On that basis, Grafton ended the half with net debt of £209.9m. But excluding IFRS 16 leases, we’re looking at a net cash position of £302.5m.

These are record figures, and it’s a very pleasing outcome for shareholders. But what about investors looking at the company afresh, wondering whether there’s still a buying opportunity here? In other words, what about me? Should I be looking longingly at the Grafton share price, or should I keep a bargepole’s distance?

Fundamental valuation

Well, the share price is significantly elevated, after this year’s run. But what has that done to the valuation? Doubling up the first half earnings per share figure, the current 1,400p share price gives us a price-to-earnings multiple of approximately 14. That’s close to bang on the long-term average for the FTSE 100. The dividend yield, estimated on the same basis, is a bit low at 1.2%. But it’s covered around sixfold by earnings, suggesting there’s plenty of scope for accelerated dividends in the future.

This guesswork is based on a static second half, though. And analysts expect it to do better than that and for the growth continue. So a Grafton share price valuation based on annualising the first-half figures might fall significantly short.

Part of Grafton’s growth plan involves acquisitions, and there seems to be plenty of cash to pursue that. Saying that, I have seen too many companies come a cropper over the years by over-stretching themselves. Then when a slowdown comes, they find themselves in a pinch.

Grafton share price future?

For Grafton, I wonder how much of the growth is sustainable and how much is down to the pandemic effect. DIY demand did climb, and materials shortages have led to higher prices and fatter margins. Should the demand/supply balance shift, we could see falling prices putting a squeeze on margins again.

Saying that, for now at least, Grafton still looks like a tempting growth prospect on fundamental measures. I won’t buy based on this short inspection, or on one set of interim results. But I do intend to take a much closer look at the company.

One FTSE “Snowball Stock” With Runaway Revenues

Looking for new share ideas?

Grab this FREE report now.

Inside, you discover one FTSE company with a runaway snowball of profits.

From 2015-2019…

  • Revenues increased 38.6%.
  • Its net income went up 19.7 times!
  • Since 2012, revenues from regular users have almost DOUBLED

The opportunity here really is astounding.

In fact, one of its own board members recently snapped up 25,000 shares using their own money...

So why sit on the side lines a minute longer?

You could have the full details on this company right now.

Grab your free report – while it’s online.

Alan Oscroft has no position in any of the shares mentioned. 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.

More on Investing Articles

Senior woman wearing glasses using laptop at home
Investing Articles

SSE shares are up 15% since the market correction! Should I buy?

Jabran Khan looks at why SSE shares have been on an upward trajectory in recent weeks and decides if he…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

After crashing 29%, Spectris shares look cheap to me

After peaking at 4,167p last September, Spectris shares have slumped by over 29%. But I see deep value in the…

Read more »

British Pennies on a Pound Note
Investing Articles

Here is why I added this dirt-cheap FTSE 100 penny stock to my holdings!

Jabran Khan explains why he added this dirt-cheap FTSE 100 stock to his holdings and is excited by its recovery…

Read more »

Woman looking at a jar of pennies
Investing Articles

3 FTSE 100 penny stocks! Which is the cheapest buy?

Our writer examines three penny stocks that feature in the FTSE 100 index to ascertain whether they have a place…

Read more »

Arrowings ascending on a chalkboard
Investing Articles

Is the Vodafone share price an opportunity at current levels?

Jabran Khan looks at the current Vodafone share price and decides if he would add the shares to his holdings…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

4 gems I’d include in my Stocks & Shares ISA

Jon Smith explains some of the top stocks he's thinking about including in his Stocks and Shares ISA a we…

Read more »

Compass pointing towards 'best price'
Investing Articles

At 85p, are Rolls-Royce shares a no-brainer buy? 

The Rolls-Royce share price look very cheap right now. And I think this might be my last chance to buy…

Read more »

positive mental health woman
Investing Articles

My £3-a-day blue-chip passive income plan

Our writer sets out his passive income plan of investing a few pounds each day in top stocks.

Read more »