The UK is home to a wide range of income stocks, not all of which get the praise they deserve. One company from my portfolio that seems to be lagging behind is Howden Joinery Group (LSE:HWDN). While the stock has climbed more than 40% in the last 12 months, on a multiples basis, it’s still trailing behind its industry average.
Today, shares of this kitchens and construction materials distribution business trade at a price-to-earnings ratio (P/E) of 11. By comparison, its peer group is hovering closer to 17. There are some valid concerns that could explain this discount. But in my opinion, income investors currently have a chance to consider snapping up a terrific business at a fair price. Here’s why.
Home renovation during inflation
With the cost of living going through the roof this year, kitchen renovation, among other rooms, isn’t exactly top of the priority list for most households. After all, a new kitchen can cost £10,000 or more. And with mortgages surging, not everyone has this level of disposable income at their fingertips.
The impact of this macroeconomic pressure is starting to be revealed in Howden’s financial results. Over the first six months of 2023, revenue came in basically flat, with operating profits dropping by 21.5%. Yet management still hiked dividends.
The drop in profitability doesn’t appear to be caused by inflation. In fact, gross margins are some of the highest in its industry at 61%. Instead, the firm has been deliberately spending money to introduce new operational efficiencies that should start to yield tangible results in 2024.
As for the flat sales, the cause is ultimately just temporary. Given that 2022 was a record-breaking year, I think it’s impressive that management was able to maintain its sales figures. Once inflation cools off and the economy stabilises, I’d expect to see revenue return to growth. In fact, Howden may be about to enjoy a new multi-year tailwind.
Profiting from higher interest rates
The Bank of England looks like it’s going to maintain interest rates at an elevated level for a while. Therefore, families are more likely to stay put for longer. And that might be the catalyst that sparks a rising demand for home renovation. In fact, a survey by the National Association of Home Builders revealed that home renovation demand is on track to rise again in 2024.
That’s obviously an encouraging sign. But like any prediction, it needs to be taken with a pinch of salt. Even if demand increases as expected, there are still some risks surrounding this business. Most notable is the threat of potential supply chain disruptions.
Even if just a few components are missing, tradesmen will be unable to complete renovations on time. And that might push customers to competitors like Bradfords.
The bottom line
No investment is without its risks. But in the case of Howden, I feel it’s one worth taking. The group has a fairly solid track record of defying expectations, with a long history of hiking dividends sensibly. Pairing all this with a modest valuation makes it an income stock I plan on buying more of.
