Can I afford to miss a Wickes shares bargain?

Wickes shares are trading at a low P/E ratio compared to peers. Is this enough of a bargain to force some changes in my portfolio?

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After spinning off from Travis Perkins in February 2022, Wickes (LSE: WIX) shares tumbled in price from 264p to a low of around 115p in October 2022. Even after a recovery in the share price to 151p, the price-to-earnings (P/E) ratio is just 8.9, which looks inviting compared to both the wider market and the company’s industry peers.

Given that Wickes’s sales gave grown at 8.6% on average over the last five years, its profits are forecasted to increase and its 2023 forecasted dividend yield is 7.2%, its stock might be a bargain that’s too good to miss. So, I should take a closer look.

A fixer-upper

Wickes is a home improvement retailer that operates through 230 stores and online platforms. Its core customers are local tradespeople and DIYers. But it also has a flourishing do-it-for-me (DIFM) business in which it arranges and pays for someone to install what its customers select in-store and online.

I should begin by seeing how the company is doing now. On 31 Jan 2023, Wickes published its trading update for the last quarter of 2022. Coming in at five pages long, it was pretty brief, but here are the key points from it:

  • Like-for-like core sales were up 11.5% year-on-year (YoY) for the quarter and 3.5% for the year;
  • Like-for-like DIFM sales were up 34.5% YoY for the quarter and 26% for the full year;
  • DIFM order book was lower at the end of 2022 than in 2021 but higher than in 2019;
  • Full-year 2022 adjusted profit before tax is expected to be in line with market expectations;
  • In 2023 energy costs are expected to be £10m higher, and wage costs £3.5m higher than in 2022.

The Wickes share price did trend lower on the day of the trading report, but it’s still in the range it has been in since the start of 2023. Overall, management is happy with the recent trading performance but does seem to be warning about 2023. I am just not seeing anything to get too excited about here, nor much to get gloomy about.

Are Wickes shares too good miss?

Compared to the average P/E ratio for speciality retailers of 10.0, Wickes looks cheap. Kingfisher is a close rival that trades at a P/E ratio of 11.2.

Now, I own Kingfisher in my Stocks and Shares ISA. I don’t want to own two of these types of stocks, so should I swap one for the other? Well, according to Statista the UK DIY & Hardware Store market is forecast to be $34bn in 2023 — yes, that’s unhelpfully dollars. Now after some conversions, Wickes has about 5% of the market based on analyst estimates. Kingfisher is about 10 times larger in terms of revenues so it should have about half the market.

And I don’t see much in the way of competitive advantages in this market. So the most efficient and safe operator, with the largest market share is the one I would pick. Kingfisher is bigger and has higher operating margins and returns on capital employed. It is less leveraged, and its liquidity position looks more secure. Although historically higher, Wickes’s sales growth is forecasted to be comparable with Kingfisher’s in the next couple of years.

Wickes shares do look cheap, but I am going to stick with what I have got.

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.

James McCombie has positions in Kingfisher Plc. The Motley Fool UK has no position in any of the shares mentioned. 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.

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