Shares in home improvement retailer Kingfisher (LSE:KGF) jumped 19% on Tuesday (23 September). But I’ve no intention of buying shares in the FTSE 100 company.
What I am focused on, however, is the H1 update that caused the share price to surge. Because I think it could be a very positive sign for a stock I’m much more interested in.
Kingfisher Group
Kingfisher is the company that owns home improvement stores like B&Q and Screwfix. And the firm reported like-for-like revenue growth of 1.9%.
This isn’t particularly exciting, but adjusted pre-tax profits were up 10% as a result of better cost controls. And management expects the firm to generate at least £480m in free cash flow this year.
That makes the stock look ridiculously cheap at an enterprise value of £4.7bn, so the company is accelerating its share buyback programme. And that’s a move I wholeheartedly approve of.
Despite all this, I’m still not that interested in buying Kingfisher shares right now. Before I say why, let me point out something that did catch my attention.
UK growth
Kingfisher’s like-for-like sales growth might only have been 1.9% overall, but UK revenues came in 3.9% higher. And there were several reasons for this.
One was an increase in demand for seasonal (garden) products during unusually warm summer weather. People might not have wanted Greggs sausage rolls in the heat, but they did want barbecues.
Another important reason was high demand for big-ticket items, such as kitchens and bathrooms and a third was strong growth in trade sales. And it’s these that stand out to me.
Both are signs of UK consumer spending being relatively resilient. But this points me in the direction of another FTSE 100 company that might be a beneficiary.
Howden Joinery Group
Shares in Howden Joinery Group (LSE:HWDN) climbed around 3% after Kingfisher’s report. But I think it’s in a much better position to benefit from the increase in UK demand.
Unlike Kingfisher, Howden gets substantially all of its revenues from the UK trade industry. That kind of concentration can be a risk, but it could be an advantage at times like this one.
Inflation is also a risk that investors shouldn’t overlook. But on a price-to-book (P/B) basis (the metric I prefer to use for companies with cyclical earnings) the stock is near its Covid-19 lows.
Given this, I think the prospect of a revenue boost is very interesting. And there are also reasons to like the business from a long-term perspective as well.
Long-term investing
Howden Joinery Group has a unique business model that involves selling out of warehouses, rather than expensive retail stores. And that gives it a number of natural advantages.
These include lower costs (which lead to higher margins) and more revenue stability (as a result of its focus on trade). That’s why I like the stock more, despite Kingfisher’s impressive recent results.
Kingfisher is doing an impressive job of protecting its margins in an inflationary environment. But I’m sceptical of the idea that managing costs can offset weak sales growth over the long term.
Howden’s next scheduled trading update isn’t until 6 November, so I’ve got time to work out what to do. But positive signs from a FTSE 100 rival have got me thinking carefully about buying.
