Results this month could send this cheap share rocketing

The last month or so has seen the FTSE 100 really recover. I hope this precedes an end-of-year rally in the stock market. If it does, I think Norcros (LSE: NXR) could be one of the major winners.

Low price and dividend growth potential

Norcros manufactures and sells branded showers and owns brands such as Triton. Similar companies have seen strong growth since the pandemic as people focused on home improvement.

This is one reason why I think Norcros half-year results, which will be out on Thursday (11 November), could be positive.

Yet wider expectations don’t seem to be that high because Norcros shares are cheap, trading on a P/E of just 10. This provides the firm with the opportunity to outperform expectations, and that could be good for the share price. The forward PEG of only 0.6 is another indication to me that the shares could be undervalued.

The dividend also has plenty of room to grow as the yield is modest at the moment at 2.5%. The dividend is covered more than twice by earnings and has recovered to a level near to what it was pre-pandemic.

I like what I see about the shares, beyond the low P/E. Norcros also has a good return on capital employed (ROCE) of 12. Return on equity is the same figure. Taken together I think these numbers show that Norcros could be a quality company. That boosts my confidence in its long-term potential.

What could go wrong?

Despite my expectations, of course, things might not go as planned for the firm. Norcros is turning around its South African business, but progress might not be as good as management hopes. In the UK tax rises and a squeeze of household budgets may limit home improvement spending too, which would likely hit the firm.

Potentially it could also overpay for acquisitions, which could hurt shareholder returns. Low organic growth, if it doesn’t improve the performance of the brands it already owns, may also hit the share price.

The pension deficit (boring and easy to overlook, I know) is also coming down but is still a drain on the company. It requires Norcros to use cash for pensions rather than spending on acquisitions, investing in its brands or other growth, or paying a larger dividend. The deficit has been massively reduced so it’s now less of an issue and requires less cash. But it’s still over £18m in deficit. 

At the end of the day, it’s hard to tell what any share price will do in the short term. But I expect that a good update this week could see the share price do very well this month if investors respond positively. And it could also provide evidence that Norcros could do well in the future too. I already own Norcros shares and for me, their low price, the firm’s decent returns on capital and growing dividend make it a long-term hold, unless something goes very wrong.