I believe Howden Joinery (LSE: HWDN) could be one of the best businesses trading in London today. Over the past five years, the company’s revenue has risen by 44%, from £900m to £1.3bn, and pre-tax profit has more than doubled. Over the same period earnings per share have increased by 110% and shares in the business have risen 223% (since mid-2012), excluding dividends off the back of this earnings growth.
Unfortunately, after this impressive run, City analysts believe the company’s growth is going to slow in the years ahead, and half-year figures out from Howden today seem to confirm this.
For the 24 weeks to 10 June, Howden’s revenue increased 4%, but operating profits declined to £66.6m from last year’s £74.7m, reflecting the additional costs of opening a new distribution centre. Earnings per share for the period fell to 8.4p from last year’s 9.1p.
Long-term growth
According to today’s release, management believes the firm is on track to hit its forecasts for the full year. City analysts are predicting unchanged earnings per share year-on-year, so after earnings fell in the first half, it seems a recovery is expected during the second half.
And going forward, the group has enormous scope for growth. Management is planning to open up to 800 depots in the UK, up from 653 at the end of the first half. A further 20 new depots are expected to open for business during the second half. This expansion should underpin further earnings growth and management is committed to returning cash to investors via dividends and a recently-commissioned £80m share buyback. The shares currently support a dividend yield of 2.6%.
All in all, considering Howden’s historical growth, the company’s potential and relatively modest valuation of only 14.3 times forward earnings, I believe the shares offer an excellent long term opportunity for investors.
Market leader
Travis Perkins (LSE: TPK) is another company I think has a bright future. Even though its shares have struggled over the past year, falling 5.8%, excluding dividends, they look attractive from a long-term perspective.
As a well-established supplier to the building trade, Travis has a huge existing network of depots and contacts that will be hard to replicate for any new entrant to the market. This means that while the company may be facing headwinds today when the construction market returns to growth, the group is well placed to capitalise on the expansion.
City analysts have pencilled in a fall of 4% in earnings per share for this year, but pre-tax profit is expected to rise to £355m, the highest level in more than five years. Further growth in profitability is expected next year with a pre-tax profit of £374m projected.
These numbers show that while the market may have turned its back on Travis, the company continues to expand. Like Howden, shares in Travis trade at an attractive forward P/E of 12.7 and support a dividend yield of 3.2%.
