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.
The 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.
