DIY chain Kingfisher (LSE: KGF) is best known in the UK as the owner of B&Q and Screwfix. The group’s share price has fallen by 35% from its pandemic peak in 2021.
But I think the shares are starting to look like a bargain buy.
A return to growth?
In addition to its well-known UK businesses, Kingfisher also owns similar DIY groups in France and Poland. The stock did well during the pandemic as lockdown living left homeowners with spare cash and a desire to update their homes.
Obviously that picture has reversed over the last year, as markets have priced in the risk of a recession.
Surging cost inflation has put pressure on many household budgets. If we do still have spare cash, we’re more likely to be spending it on holidays or activities outside the home.
Kingfisher’s stock slump was a logical response to this changing outlook. But recent results suggest to me that the worst could be over. The group’s third-quarter results showed a return to like-for-like sales growth, with comparable revenue up by 0.2% compared to the same period last year. Total sales rose by 0.6% to £3,263m, reflecting growth at Screwfix and Castorama Poland.
What happens next?
Kingfisher generates more than half its sales outside the UK. This business isn’t just a play on the UK economy. Although the outlook for 2023 is uncertain, I think that view is probably already priced into the shares.
Broker forecasts suggest Kingfisher’s adjusted earnings will fall by 18% for the year ending 31 January. City analysts have then pencilled in a further 12% drop for the 2023/24 financial year.
This might seem gloomy, but this outlook is already known by the market. The falling share price means that this FTSE 100 firm is now trading on just nine times 2023/24 forecast earnings, with a dividend yield of over 5%.
The dividend is expected to be covered twice by earnings, which I think makes a cut unlikely.
Meanwhile, earnings are expected to return to growth in 2024/25. That might sound a long way away now, but because of the company’s odd financial year, it’s actually only 14 months down the road.
In my view, this could be the perfect time to start building a position in this FTSE 100 stock, before the wider market turns more positive on the long-term future of this business.
Kingfisher shares: time to buy?
Kingfisher’s finances look healthy to me and it has a strong record of generating cash for shareholder returns. I think the stock offers good value at current levels.
However, there’s no denying that the outlook for next year remains uncertain. Chief executive Thierry Garnier admits that the market “remains challenging” and says “competitive pricing remains a priority.” That could be good news for customers but might put pressure on profit margins.
I think the best approach right now would be to start buying Kingfisher shares at current levels, with a view to buying more if trading remains positive during the first half of next year.
