Finding a growth stock to add to my holdings doesn’t always involve looking for the next big thing. I reckon there are plenty of established firms that possess tremendous growth potential, as well as sound fundamentals.
One pick that I came across recently is Coats Group (LSE: COA).
Let’s pick apart the business and break down my investment case.
Laying the threads bare
Coats Group is one of the leading thread manufacturers in the world with a presence in over 100 countries. It supplies thread as well as other sewing supplies to its customers that are mainly in the apparel and footwear industry.
The shares have had a good 12-month period, rising 27%. At this time last year, they were trading for 76p, compared to current levels of 96p.
To buy or not to buy?
Starting with the bull case, there’s lots to like about Coats Group, in my view. Firstly, I reckon the business has defensive traits. This is because no matter the economic outlook, or consumer budgets, clothes are an essential purchase for all. We all need to wear them, as much as this heat makes me want to wear much less. In addition to this, the firm’s vast presence and experience are also plus points.
Next, Coats’ most recent update, a half-year report released at the beginning of August for the six months ended 30 June 2024, made for good reading. From a financial view, revenue increased by 7% compared to the same period last year. Also, earnings per share, margin levels, its dividend, and free cash flow were all up. Net debt was down, which is also a good sign. From a strategic view, cost-cutting and streamlining operations has helped the firm save millions.
Speaking of dividends, a yield of 2.3% helps my investment case. However, it is worth mentioning that dividends are never guaranteed.
Moving to the other side of the coin, Coats shares could have some growth priced in already. They trade on a price-to-earnings ratio of 18. This could be seen as high, and if earnings or trading took a dent, the share price could fall.
Another worry for me is inflationary impact on costs and margins due to global economic volatility. Increasing costs could dent profitability and returns.
Finally, I’ll keep an eye on its balance sheet and debt levels. Although it looks to have come down recently, it still stands close to $350m. Even if it’s manageable, this is a sizable amount to service and manage, especially in a high interest environment.
My verdict
In my view, Coats’ market position, experience, recent trading, and future outlook are all favourable. The current value of the shares is a bit of a downer. However, the firm’s defensive ability is hard to ignore, as well as the passive income opportunity.
When I next have some investing funds, I’d be willing to buy some Coats shares for returns and growth.
