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1 cheap stock I’d buy to beat the next lockdown

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Because of the country’s rising population, the UK government has been pushing for the further construction of new housing. The Covid-19 pandemic has certainly been impeding progress in this area, particularly during the March lockdown. However, analysts at the research firm Statista are still estimating the completion of 200,000 new homes this year, with a further 405,000 by 2022. By comparison, 2019 saw the completion of only 185,000 homes.

There were also approximately 29m homes in the UK at the end of 2019. A more interesting figure is that around 19.7m of these were built before 1972. In other words, almost 68% of homes in the UK are over 50 years old.

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The continued need for new housing along with the vast majority of homes needing maintenance or refurbishment, has created a favourable market condition for this stock to thrive.

The lockdown opportunity

Howdens Joinery Group (LSE:HWDN) is the UK’s largest kitchen supplier. Using its network of over 700 depots around the country, the company sells both kitchens and kitchen appliances – under the Lamona brand – directly to local businesses.

The firm has built up strong relationships with suppliers, granting it access to premium materials at competitive prices. From there, the rest of operations are vertically integrated. That means Howdens completely controls the production, manufacturing, and distribution of its products to a customer’s local depot.

The depot network has become so vast that approximately 85% of customers are within 5 miles of one.

The business has become sticky with its customers (that is, created customer loyalty) by providing outstanding service. Beyond merely selling products, workers at the depots engage with customers, offering design and planning services, or just general advice about their projects to help them succeed.

Maintaining such high quality across a vast network is a difficult feat. However, by incentivising depot managers with a percentage of profits they generate, Howdens has managed to both sustain and expand its reputation and value.

The financials

2020 has been a tough year. Covid-19 has significantly impacted revenue due to temporary depot closures and customers staying home during lockdown periods.

Looking at the half-year results, there was a significant decrease of 29% in topline revenue, with similar declines in profits. However, this lower performance stems entirely from the second quarter, when businesses were temporarily shut down. The first quarter of 2020 actually saw an increase in revenue, albeit just 1%. More recently, third-quarter revenues rose 12% compared to the previous year.

Revenue is growing even faster over in Europe, with Belgian operations seeing a 33% increase in revenue during the third quarter as well.

The bottom line

The large disruptions from Covid-19 on Howdens seem to have passed. England is now going into a second lockdown, however, there are far fewer restrictions on the construction industry than before.

With a vast array of competitive advantages – including its scale and reputation for quality and service – I think Howdens is perfectly capable of surviving this lockdown.

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Zaven Boyrazian does not own shares in Howdens Joinery Group. The Motley Fool UK has recommended Howden Joinery Group. 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.

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