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What’s going on with the Coats share price?

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A selection of Coats Group threads
Image: Coats Group

Threadmaker Coats (LSE: COA) can trace its history back centuries. But its performance on the London stock exchange in recent decades has been underwhelming. The past five years have seen stronger performance. The Coats share price has gained 18% over the past year alone. But lately it’s been falling, and is 17% lower than its high last month.

What’s going on with the Coats share price?

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Decent business performance

Fretting about the Coats share price is nothing new. The late diarist Alan Clark, whose family fortune began with a Paisley threadmaker swallowed up by the company, frequently mentioned the Coats share price in his Diaries. The longevity of such concerns partly reflects structural challenges to the share price of thread manufacturers. Inputs are commodities, so can be subject to wild price swings. Low cost competitors in the global economy threaten profit margins. Demand can be subject to the economic cycle, threatening revenues and profits.

But as well as such general concerns, Coats has had to contend with more specific challenges. Lockdown impacts in India ate into its first-half performance, for example. Overall, though, I think the recent news from Coats has been encouraging. Organic revenue in the first half was slightly higher than the pre-pandemic level two years previously. Organic operating profit was flat, while reported operating profit was down 4%, a bit disappointing, but not bad considering the supply chain challenges which have added to the company’s costs.

Net debt excluding leases fell, and the interim dividend was resumed at a level over 10% higher than before the pandemic. The company also modestly upgraded its expectations for the full year.

Why has the Coats share price fallen?

That explains why the company’s shares have moved upwards in the past year. But it doesn’t cast much light on the recent fall. If earnings per share come in at roughly pre-pandemic levels, the current price-to-earnings ratio is around 14, which I think is attractive. There has been no particular piece of bad news in recent weeks that might explain the downwards movement in the Coats share price.

I think probably a couple of factors are at play. First, after a strong run over the summer, the shares have simply given up some of their previous gains as investors have locked in profits. Secondly, nervousness about mounting costs in supply chains has hurt investor confidence in the Coats investment case.

I do see supply chain issues as a risk to Coats. It is heavily integrated into a globalised supply chain, both on its input and output side. The company sells to around 40,000 customers in 100 countries. In a cost competitive industry it may be hard for Coats to pass on all increased logistics charges to customers. That could eat into profit margins, and may help explain the fall in reported operating profit margin seen at the interim results stage.

Where next for the Coats share price?

But I don’t expect possible margin compression from increased logistics costs to damage the investment case for Coats over the long term. As the interim results showed, the business is performing decently, sales have recovered and management is upbeat about prospects for the rest of the year.

On that basis, I think the recent correction in the Coats share price may prove to be fairly short lived.

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Christopher Ruane has no position in any shares mentioned. The Motley Fool UK has recommended Coats Group. 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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