If I had bought shares in building materials supplier Howden Joinery (LSE: HWDN) last October, by market close yesterday I would have been sitting on a 33% price gain. Coincidentally, the five-year track record is also a 33% gain.
However, with uncertain demand in the housing market, what might come next?
The company issued a trading statement today (2 November) that I think could dampen City enthusiasm for the shares.
Good news but downbeat tone
The statement was fairly positive in many ways.
The company said it has gained market share in its most recent six-month trading period. International revenues continued to grow and were up 9.9% year to date compared to the prior year period. The company maintained its full-year outlook.
However, although the headline performance was good, the trading statement contained some less positive elements.
The full-year outlook was maintained, but performance is now expected to be “towards the lower end of the range of analysts’ consensus forecasts”. Both the core UK and international operations saw weaker sales performance in the second half than in the first.
Most alarmingly, the UK saw second half sales fall 2% (or 3.3% on a like-for-like basis) compared to the same period last year.
A fall in revenue does not necessarily mean sales volumes fell. It could be caused by lowering prices, for example. But the company gave no explanation. I think a weakening market for building supplies is starting to show up in the sales figures of companies like Howden.
Where’s the wind blowing?
Compared to last month’s profit warning from Travis Perkins, Howden’s update was actually somewhat reassuring.
While the two businesses are not directly comparable they do have significant overlap. Travis Perkins pointed to price deflation as one reason for its third-quarter sales year-on-year decline of 18%.
Yet Howden Joinery has a number of strengths, in my view. I like its extensive depot network and established focus on building deep relationships with big-spending trade customers. While an uncertain housing market outlook could hurt demand for building products, there should still be sizeable demand over the long term.
If its business model helps it ride out a demand downturn by building market share, for example, I think Howden’s shares could gain value from here. After all, the current price-to-earnings ratio of 10 does not look expensive if earnings are maintained.
On the other hand, the latest trading statement could just be the first concrete sign that Howden, like its competitors, is set to suffer lower revenues and perhaps smaller profits due to a period of weaker customer demand.
No rush to buy
So although I like the shares and have owned them in the past, I am in no rush to add them back into my portfolio.
The party may not be over yet: the shares could rise due to the company performing well relative to rivals.
But it increasingly looks like the building supplies trade is in for a difficult period. I expect that to catch up with Howden sooner or later.
I will wait to see how the building supplies market demand unfolds before reassessing whether to add the company back into my portfolio.
