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Kingfisher plc Slides On Earnings Miss: Better Value Elsewhere?

Kingfisher (LSE: KGF) shares have fallen by nearly 6% this morning, thanks to a disappointing first-quarter trading statement.

Although UK like-for-like sales rose by 10.1%, and French sales struggled 1.6% higher in the face of France’s flagging economy, these figures were flattered by dire sales during the first quarter of 2013, which was badly affected by snow in the UK.

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housesThe second problem was that Kingfisher’s gross profit margin in the UK, where it trades as B&Q and Screwfix, fell by 2% during the first quarter of this year, suggesting that the firm is being forced into heavier discounting in order to support sales.

Rising shareholder returns

There was some good news: as part of its ongoing £200m capital return programme, Kingfisher announced a 4.2p special dividend this morning.

Current forecasts are for Kingfisher to pay an ordinary dividend of 11.1p this year, so the addition of the special payout increases the yield to a prospective 3.9%.

Kingfisher vs. the rest

Kingfisher shares have risen by 122% since 2009 and currently trade on a fairly full valuation, with a forecast P/E of 15, and a prospective ordinary dividend yield of 2.8%, below the FTSE 100 average of 3.5%.

Although Kingfisher has a strong balance sheet, it is a cyclical business, and investors should remember that previous downturns have seen dividend cuts and lacklustre share price performance.

On the face of it, now might be a good time to take profits — but anyone looking for an alternative investment in the non-food retail sector may struggle, as Kingfisher’s peers trade on similar valuations:

2014/15 forecast metrics Kingfisher Halfords (LSE: HFD) Home Retail Group (LSE: HOME)
P/E 15.1 16.2 16.6
Yield (exc. special dividends) 2.8% 2.9% 1.9%
Earnings per share growth 13% 10% 10%

One point in favour of all three of these companies is their low debt levels — Kingfisher and Home Retail Group have net cash, while Halfords has net gearing of just 18%. This compares very favourably with the UK’s supermarket sector, which looks cheap on a P/E basis, but has average gearing levels heading towards 50%, and limited prospects for earnings growth.

However, analysts’ forecasts are notorious for extrapolating existing trends, rather than spotting likely turning points. A different interpretation of the data above might suggest each of these three firms looks fully valued and could be vulnerable to a correction if earnings growth disappoints — as we saw with Kingfisher this morning.

Personally, Kingfisher is not a stock I would buy at the tail end of a long bull run, with the housing market already booming — the time to buy this stock is during housing downturns.

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> Roland does not own shares in any of the companies mentioned in this article.

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