Shares in Kingfisher (LSE: KGF) (NASDAQOTH: KGFHY.US) have made a strong start to 2014, with the owner of B&Q and Screwfix currently up 7% for the year. This compares favourably to the performance of the FTSE 100, which is down 1% year-to-date. However, Kingfisher could continue its strong run — here’s why.
An Exposure To France
With around 40% of its revenue being generated in France, Kingfisher has often seen market sentiment dampen due to the challenges faced by the eurozone economy. Indeed, with Europe having shown anaemic levels of growth in recent years, it is of little surprise that companies that rely on the region for a sizeable portion of their revenue have been less popular then, for example, emerging market-focused companies.
However, with Europe showing green shoots of recovery over the last year, Kingfisher’s exposure to France does not appear to be the problem it once was. In fact, it seems to have been a key reason why shares have performed well of late, with progress made in the eurozone being a positive surprise for investors and helping to improve sentiment in stocks such as Kingfisher. Further progress in Europe could mean improved sentiment for Kingfisher in future.
The Strength Of The UK
With around 40% of revenue also being generated in the UK, Kingfisher has a vested interest in the UK economy performing well. Indeed, Kingfisher’s fate as a home improvement retailer is very closely linked to the state of the housing market in terms of volume of transactions rather than house prices. That’s because a considerable proportion of home repairs (especially DIY) are carried out by movers and first-time buyers, so policies such as the government’s Help To Buy scheme should continue to benefit Kingfisher. Further increases in the volume of housing transactions could continue to stimulate Kingfisher’s top and bottom lines.
With shares in Kingfisher trading on a price-to-earnings (P/E) ratio of 16.2, it may appear as though they are overpriced — especially when the FTSE 100’s P/E is currently 13.3. However, Kingfisher appears to have more potential than many of its peers, with earnings per share (EPS) forecast to grow by 9% this year and 14% next year (versus an average for the index of between 4% and 7%).
Indeed, with the prospects for the UK and European economies seemingly on the up, Kingfisher could continue to experience improved sentiment and deliver further gains.
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Peter owns shares in Kingfisher.