The FTSE 100 building merchant Howden Joinery (LSE: HWDN) is used to customers taking an axe to its products. But investors have also been cutting down the Howden Joinery share price lately. It has fallen 19% over the past year – and over 30% so far in 2022.
I think the share is now approaching the sort of bargain territory I’d snap up as a long-term holding for my portfolio.
Strong business with a Buffett-style moat
Howden has an attractive business I think has the sort of moat-like competitive advantage that appeals to investor Warren Buffett.
Wood is heavy to transport, which adds costs. Building projects also suddenly require extra pieces at short notice, for example if a problem on a building site damages some product in use. That means timber merchants often do well in a local area, because customers can benefit from convenience and speed by using a nearby yard.
Howden has a strong brand. It has spent years building up relationships with trade customers. At retail stores like B&Q, some customers may only pop in occasionally for fairly small amounts of wood. By contrast, Howden has many customers who regularly buy large quantities and may need to keep doing so for decades.
So I think the firm has been smart to focus on trade customers as those relationships have the potential to be highly profitable over the long term. Last year, the company’s pre-tax profit margin was 15%. That is attractive to me.
3% dividend yield
As inflation grows sharply, a lot of investors are paying more attention to companies’ dividends. Howden currently offers a yield of 3%. I find that an attractive proposition.
No dividend is ever a sure thing and in 2020, during the pandemic, Howden cancelled its final dividend for 2019. Although it later paid a special dividend, effectively in lieu of the cancelled one, there is clearly a risk that if a recession hurts Howden’s profits badly, the dividend could again be on the chopping block.
Could a recession hurt the Howden Joinery share price?
Given the attractive business model and decent dividend yield, why has the Howden Joinery share price been sliding?
I think the most likely explanation is fears that a worsening economy could hurt the housing market. That could lead to lower sales, just as inflation pushes up costs for the firm. That does not sound like a promising combination.
Earlier this year, the company said it had “made an encouraging start to 2022“, adding “confident in our resilient business model across changing market conditions“.
Last month, the firm said it remained on track with its outlook for this year. So, at the moment, I think concerns about an economic slowdown remain detached from the business reality at Howdens. However, that could still change later in the year or beyond.
My next move
I think the business model at Howdens is attractive. Despite the risk of lower business if building activity falls, I think the model is fairly robust. Builders always need supplies even if the amounts wax and wane.
The share price fall has made the company more attractively priced. I am considering adding it to my portfolio over the next few days.
