Down a fifth in the past five years, Topps Tiles (LSE: TPT) has undoubtedly been a disappointment for some investors. While the FTSE 250 share does at least offer a 7.5% yield, the long-term price performance has been poor.
With the possibility of a housing downturn posing a risk to sales and profits for the business, the investment case for Topps may not seem compelling.
However, I have added it to my portfolio. If I had spare cash to invest in September, I would be happy to stock up on the FTSE 250 share.
Here’s why.
Strong market position
A difficult housing market could indeed see demand for building and decorative materials like tiles to fall. Then again, if a weak housing market leads to fewer home sales, some owners may decide instead to spruce up their current accommodation. That could see tile sales rise.
Over the long run, I expect strong demand for tiles. Fashions come and go, but tiles in one form or another have been with us for centuries and I expect them to hang around for a long time yet.
Topps has had a strategy in recent years focussed on capturing 20% share of the UK tile market.
Solid business performance
In its most recent trading statement, published last month, the company hit an upbeat note about current business. That came hot on the heels of a record level of revenues in the first half of its financial year.
With three-quarters of its financial year gone, the group reported like total sales growth of 7.6% compared to the equivalent period last year. The growth trend seems to be slowing, however, as the most recent quarter saw year-on-year sales growth of 4.4%. I still think that is solid, but if sales growth continues to fall, at some point revenues could decline.
Attractive valuation
But I think from a long-term perspective, this FTSE 250 company is well-positioned to weather the storm.
Whether that turns out to be true remains to be seen. Ongoing inflation could eat into profits. The impact of a slow housing market is also a risk.
Before the 2007 financial crisis, Topps topped £3 per share. They now change hands for around one sixth of that price even though the business looks in good shape.
Given its strong market position and solid commercial performance, I remain surprised that this FTSE 250 share sells at the price it does.
The price-to-earnings (P/E) ratio based on last year’s earnings is around nine. Profitability dipped in the first half of the current financial year, so the prospective P/E ratio may be less attractive. But in the long term, I expect Topps should be able to translate growing sales revenues into higher earnings.
Given that, I think the current share price looks like a bargain.
