A ridiculously cheap FTSE 250 stock to buy in July

The FTSE 250 is still down significantly from last year’s correction, creating amazing buying opportunities for patient investors. But is this the best one?

| 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.

A senior group of friends enjoying rowing on the River Derwent

Image source: Getty Images

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.

Growth stocks in the FTSE 250 are slowly recovering as investor sentiment improves. However, there are still plenty of top-notch enterprises trading at exceptionally low valuations.

One stock that’s caught my attention this month is Howden Joinery Group (LSE:HWDN). Despite posting solid results, shares have been in a downward pattern as investors focus on the short-term headwinds. As such, the market capitalisation now sits below pre-pandemic levels, despite revenue and earnings sitting around 50% higher!

Let’s take a closer look at what’s going on.

A new bargain in the FTSE 250?

As a quick reminder, Howden Joinery is a vertically integrated designer and supplier of fitted kitchens. It works directly with tradesmen out of its network of 885 depots across the UK and Europe, selling primarily to the home renovation market.

With inflation tightening household budgets, it’s no surprise that investor sentiment around this business is currently weak. After all, renovating a kitchen isn’t cheap. And given we’re in the middle of a cost-of-living crisis, families are more likely to prioritise other less elective expenses.

This concern is valid. And it’s already being reflected in Howden’s results, with growth falling from double-digits to low single-digits. However, while inflation and rising interest rates are creating headwinds today, they may evolve into tailwinds later down the line.

Higher interest rates mean more expensive mortgages. As such, the trend of moving houses every couple of years by using dirt-cheap loans is starting to reverse. And families are now more likely to stay put for longer, making the idea of renovation more alluring after several years in a property.

Management seems to share this opinion since it’s still investing heavily in its expansion both in the UK and internationally. The firm is well on its way to hitting its goal of 1,000 depots. And despite the challenges of penetrating new markets, its international network has delivered 16.8% sales growth in the first four months of 2023.

Pairing this with a P/E ratio of just 9.9, the FTSE 250 stock looks cheap in my eyes. And it would appear Howden’s leadership agrees since it recently launched a £50m share buyback programme.

Nothing is risk-free

As encouraging as Howden Joinery’s performance and valuation look, there’s a glaring elephant in the room surrounding its lease liabilities.

International expansion isn’t cheap. And while the firm has been using organic cash flow to fund this project, the majority of its new depots are leased rather than owned. As such, the group currently has £665.3m of lease liabilities on its balance sheet, which behave similarly to debt incurring interest expenses.

This is the highest level of debt equivalent obligations the group has ever had, and consequently, financing expenses are on the rise. As things stand, the company generates more than enough free cash flow to cover its leases and interest incurred. But if management accidentally bites off more than it can chew, margins may get eroded.

Nevertheless, the track record of this FTSE 250 stock is impressive in my mind. Dividends have increased 275% over the last decade, the constant stream of incremental buybacks has shrunk outstanding shares by 10% since 2018, and the business model looks primed to keep delivering value to shareholders. Therefore, despite the risks, Howden Joinery is on my personal top stocks to buy list.

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.

Zaven Boyrazian has positions in Howden Joinery Group Plc. The Motley Fool UK has recommended Howden Joinery Group Plc. 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

10%+ yield? Here’s my 5-year Legal & General dividend forecast!

With a dividend yield approaching double digits, our writer plans to hang on to his Legal & General shares. He…

Read more »

Young woman holding up three fingers
Micro-Cap Shares

This is one of the hottest stocks in the market and it only costs 3p

The UK stock market is throwing up some amazing opportunities for investors at the moment. And one doesn’t need a…

Read more »

Investing Articles

All above 8%, which of the FTSE 250’s top 10 dividend stocks by yield is the ‘best’?

There are plenty of stocks on the FTSE 250 that have generous dividend yields. Our writer looks for those offering…

Read more »

Electric cars charging at a charging station
Investing Articles

Should I buy Tesla stock before 10 October?

Tesla stock investors are gearing up for one of the company's biggest and most anticipated product launches in its history.

Read more »

Investing Articles

Greggs shares have tumbled 10%. Is this now a wonderful opportunity to buy?

Through luck or skill, our writer managed to bank some juicy profit before Greggs shares fell. Is he considering buying…

Read more »

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home
Investing Articles

Forget the FTSE 100. Small-cap dividend stocks may be better for passive income!

Looking to make an above-average income from UK dividend stocks? Buying small-cap shares could be the way to go, research…

Read more »

Investing Articles

6.7% yield! Here’s the dividend forecast for HSBC shares through to 2026

HSBC shares are currently a great passive income option. Let's see if this is likely to continue by looking at…

Read more »

Investing Articles

Is the THG share price a gift for contrarian investors?

The THG share price has cratered in four years and now stands in the pennies. Christopher Ruane thinks this could…

Read more »