If you think a company needs to do something exceptional to generate exceptional returns, think again. Floorcovering designer, manufacturer and distributor Victoria (LSE: VCP) has done wonders for the wealth of early investors, despite being in a rather dull line of business. In just five years, the value of its stock has soared from a little under 17p to 840p.
Based on recent numbers, there could be more upside ahead.
July’s results for the 12 months to the end of March revealed a “fifth consecutive year of strong growth” with revenue jumping 29% to £424.8m. Underlying pre-tax profit also rose 39% to a little under £41m. All this came despite the sharp increase in expenditure (from £2.5m to £11.2m) as a result of European acquisitions Ceramiche Serra and Kerben Grupo. Another acquisition — Saloni — was announced earlier this month.
With executive chairman Geoff Wilding stating that the company had already experienced “a very good start to the year,” it’s likely that relatively new holders of Victoria’s stock could still make decent money. According to Wilding, there remains “an enormous market opportunity” for the company in the both the UK and abroad.
Whether all this is sufficient to bump the stock to the top of wishlists, however, is debatable.
On almost 18 times earnings for the current year, Victoria isn’t ridiculously overpriced but it’s certainly not cheap for the sector in which it operates. Befitting its growth credentials, there’s no dividend to speak of and, at £258.7m back in March, there’s a whole lot more debt on the balance sheet now than there used to be (although the company was keen to state that this is less than 2.7 times annualised EBITDA).
If either the valuation or the lack of income bothers you, there’s another option.
Heading the other way…
While unlikely to give you the sort of returns previously generated by Victoria, I think mid-cap peer Headlam (LSE: HEAD) could still be a decent long-term investment. That’s if you’re prepared to look beyond the recent slump in its share price and a cautious near-term trading outlook.
True, today’s interim results for the six months to 30 June certainly weren’t warmly received by the market. It’s not hard to see why.
Total revenue rose by just 1% to £337.5m. In the UK, like-for-like revenue growth declined 5.2% — a concerning result considering that the firm still derives the vast proportion of its business from these shores.
Although underlying pre-tax profit of £17.7m was supported by new acquisitions, Headlam believes that “softness in the UK market” will continue for the rest of 2018. As a result, CEO Steve Wilson speculated that full-year numbers will now be “towards the lower end of current market expectations” (albeit an improvement on 2017). Price increases — scheduled for the beginning of September as a result of a rise in the cost of raw materials — are unlikely to help matters.
Trading on 10 times forecast earnings, it seems logical that Headlam will appeal to value-focused investors. With a total payout of 26p per share expected by analysts before today — equating to a cracking 5.8% yield — you could argue that any prospective purchasers will also be adequately compensated should the shares fall further. A net cash balance of £16m at the end of June is another positive.
The question, however, is whether you trust yourself not to panic before things recover.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.