1 bargain FTSE 100 stock to buy right now

Our writer thinks this FTSE 100 stock, with a strong balance sheet and promising cash flows, can win against a background of inflation and low economic growth.

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

In a falling market, I think that Howden Joinery Group (LSE:HWDN) is a bargain FTSE 100 stock that I’d like to add to my portfolio. The company’s share price has fallen by just over 30% since the beginning of the year and it’s reached a point where I’d consider it materially undervalued. 

Howden’s is a supplier of kitchens to the building trade. The company’s products include fittings, appliances, and joinery products. 

I think that Howden’s stock is a bargain at the moment. In order to see why, let’s look at why the share price has been falling and why I believe it’s undervalued at these levels.

Why has the Howden Joinery share price been falling?

In my view, the main reason that the Howden’s share price has been falling is the macroeconomic outlook. The outlook for economic growth in the UK is currently weak and inflation is high. Both of these are negative for a business like Howden’s.

Weak economic growth may well present a problem. If the economy struggles, consumers are more likely to delay or abandon plans to buy new kitchens, which would weigh on Howden’s revenues.

The macroeconomic outlook therefore appears to be a challenge for Howden’s. I think this is what’s been pushing the share price down since the start of the year.

Why is the stock a bargain?

While I think there are good reasons the Howden’s share price has been falling, I also believe that it has now fallen so far that it’s a bargain.

The current share price values the entire company at total of £3.85bn. The company also has around £76m in debt, which adds to the downside for an investor like me.

Last year, Howden’s generated £351.5m in free cash, which represents a return of around 9% per year. I think that’s extremely attractive. 

Obviously, the macroeconomic situation means that Howden’s future cash flows might well be lower than they were last year. So forecasting a 9% return every year is likely to be unrealistic.

Nonetheless, in buying this stock, I intend to hold it for a long time. I don’t think that the economic downturn will last forever and when the outlook improves, I think that Howden’s will perform well.

In the meantime, I anticipate the company’s strong balance sheet should see it through. Howden’s current assets more than cover its total liabilities, which I think means it can make it through a tough period.

After that, if the company averages 2% growth per year, the return from an investment perspective is in excess of 10% on average over the next decade.

Conclusion

Howden Joinery Group is a cyclical business – it is likely to perform better when economic conditions are favourable and worse when they are more difficult. I think that a difficult macroeconomic environment is presenting a temporary buying opportunity. I’m looking to take advantage in my own portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Howden Joinery 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.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »