The Motley Fool

Headlam Group plc soars over 7% after beating profit expectations

Shares in floorcoverings distributor Headlam (LSE: HEAD) have risen sharply today following a strong trading update. It shows the business is making better than expected progress and seems to be well placed to record further growth over the medium term. However, does this mean it’s worth buying at the present time?

Improving performance

It’s not long since Headlam reported that it was performing better than expected. In fact, on December 1 it said its financial performance would be ahead of market expectations. Since then, it has recorded even better performance due in part to more favourable trading conditions. As such, it now expects to report results before non-recurring items that are ahead of revised guidance.

Revenue for 2016 was 6% higher than in 2015, with a quarter of that growth being due to the weaker pound. The UK continues to account for the vast majority of total revenue at 88% and UK like-for-like (LFL) growth of 4.7% indicates that demand for the company’s products remains robust. Similarly, constant currency growth of 3.6% in Continental Europe (which accounts for the remaining 12% of the firm’s total sales) shows that the performance of the business has been impressive across the board. And with Headlam benefitting from price increases that could continue in future, it’s in a strong position to deliver further growth.

A bright future

While Headlam’s bottom line is forecast to rise by just 3% in 2017 and by 4% in 2018, a positive catalyst on its share price looks set to be its dividend growth. It currently yields 4.4% from a dividend that’s covered 1.6 times by profit. However, in 2018 Headlam is expected to record a rise in dividends per share of over 27%, which puts it on a forward yield of 5.7% and leaves its dividend coverage ratio at a still acceptable 1.3 times.

Given the outlook for higher inflation and low rates for savings accounts, the company’s increasing dividend could hold considerable appeal during the course of the next couple of years.

But other stocks within the same sector such as Walker Greenbank (LSE: WGB) may have superior growth potential when it comes to the bottom line. For example, the company is expected to record a rise in its earnings of 26% in 2018 and 7% the year after. However, much of this growth is already priced-in since it trades on a price-to-earnings growth (PEG) ratio of 1.8. And as it has a yield of 2.1%, it lacks income appeal compared to its sector peer.

Clearly, the outlook for both companies is somewhat uncertain. They both face a risky period where Brexit concerns could weigh on consumer spending as well as the wider UK economy. However, with sound income prospects and a business model and strategy that do seem to be working well, as evidenced by today’s update, now could be the right time to buy Headlam for the long term.

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Peter Stephens owns shares of Headlam Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.