Today, the long-term investing case for Howden Joinery Group‘s (LSE:HWDN) shares is put under the microscope by two Fools with opposing stances…
Bullish: Stephen Wright
As I see it, tighter economic conditions might be good news for Howden Joinery Group. That sounds counterintuitive — shouldn’t people having less disposable income be bad for a company selling non-essential items?
That’s one way of looking at it. But I think that rising interest rates will lead to a slowing property market. And that will cause some people to put off moving house, instead looking to make improvements to their existing properties.
A new kitchen is significantly less expensive than a new mortgage, especially with mortgage rates creeping steadily higher. That’s why I’m expecting people to look to stay put and upgrade, rather than moving.
With more cash than debt, the company’s balance sheet looks sound to me. And at a price-to-earnings ratio of 10, I don’t think the stock looks expensive.
Lastly, both the Chief Executive (Andrew Livingston) and the CFO (Paul Hayes) seem to agree. They’ve been buying the stock themselves this year.
Bearish: John Choong
Despite Howden Joinery expecting its full-year profits to come in above consensus, I believe its shares still have to account for a long recession, which could dampen the company’s earnings in the medium term.
With mortgage rates expected to remain at elevated levels for the foreseeable future, demand for houses are expected to decline as well. As such, that could mean lower top-line figures for the company than in previous years.
To support this claim, the latest manufacturing Purchasing Managers Index numbers have also been showing declines over the past few months, falling into contraction territory. UK-based companies reported lower output in November, citing weaker new work intakes and reduced employment.
This was especially the case with the intermediate goods sector, while downturns also continued at consumer and investment goods producers. Additionally, backlogs of work fell at the fastest pace for over two and a half years as business sentiment continues to plummet with weak consumer spending and subdued client confidence.
