The FTSE 250 is home to many terrific growth and income stocks that are seemingly trading at cheap prices. However, one stock that’s looking increasingly attractive right now is Howden Joinery Group (LSE:HWDN).
The fitted kitchen and now bedroom supplier saw growth essentially grind to a halt last year as weak economic conditions sent demand through the floor. In fact, 2024 marked the third consecutive year where UK kitchen demand stumbled. And yet, Howden continued to expand gross margins and steal market share from its weaker rivals, translating into a far more resilient share price over the period.
Today, the kitchen landscape seems to be shifting. The Construction Products Association (CPA) has recently issued its latest projections for the British repair, maintenance, and improvement sector – the second largest in the UK construction industry.
After shrinking by 4% in 2024, this market’s expected to return to finally return to growth in 2025 by 3% before climbing to 4% in 2026. And Hillarys — the fitted window blinds, shutters, and curtains company – expects this trend to continue through to 2030.
So what does this all mean for the Howden Joinery share price?
Earnings to double
A rebound in the home renovation market’s good news for Howden. And with the Bank of England expected to continue lowering interest rates, improved affordability could also help spark further growth.
According to Karan Singh, a portfolio manager at Fidelity, the UK kitchen market’s around 20% below 2019 levels in terms of sales volumes. Yet despite this multi-year low, volumes have already stabilised – another sign that a recovery might be underway.
As such, Singh predicts that if volumes recover to 2019 over the next few years and Howden continues to take market share, its bottom line could “almost double”, thanks to the group’s high proportion of fixed operating costs. But even if the recovery turns out to be slower than expected, Howden still has a “compelling risk-reward profile” thanks to its “strong net cash balance sheet”, which limits risk.
If Singh’s correct, that puts the forward price-to-earnings ratio of this FTSE 250 stock at just 9.7 – close to its lowest point over the last decade. In other words, Howden looks dirt cheap. And that likely explains why the stock’s already Singh’s sixth-largest holding in his Fidelity UK Opportunities Fund.
Risk versus reward
It’s hard not to get excited about the long-term prospects of Howden. But even bulls like Singh have highlighted some key risks that investors must consider. The company’s not entirely immune to macroeconomic factors and is particularly exposed to a downturn in the UK housing sector, given the strong correlation between home buying and home renovation activity.
Furthermore, while the company’s vertically integrated, it’s still sensitive to supply chain disruptions. If the company can’t source the necessary materials, order delays could push customers into the arms of better-stocked competitors.
Nevertheless, Howden has a long track record of defying expectations. And with a wide moat of competitive advantages, these are risks that may be balanced by the rewards, in my opinion. That’s why I’ve already snapped up some of the shares.
