Trading performance is unlikely to have got any better since the home furnishings firm updated shareholders during August. Indeed, I am expecting slew of fresh horrors when it releases half year numbers on October 10.

More nerve-racking releases

Last month the AIM quoted company declared that “trading in the half year continues to reflect the difficult marketplace,” with sales of its branded products having dropped 5.7% during the six months to July.

The West London firm had also shocked the market with a fresh profit warning just a week earlier, warning at the time that “new information on the potential profit contribution from [a] large licensing agreement” would see full-year profit before tax “fall materially short of the board’s expectations,” at between £9.5m and £10m.

As if this wasn’t enough, Walker Greenbank advised it was viewing the critical autumn period “with renewed caution” as trading troubles had intensified in July following a brief improvement, with orders in the year-to-date slumping below expectations.

Cheap but chilling

The question now is whether the low, low forward P/E ratio of 6.1 times now fully bakes-in the probable scale of any further problems. I believe not, and expect additional frightful commentary in the months ahead. The City is currently predicting a 27% earnings slide in the 12 months to January 2019, a figure I can see being downgraded (along with the expected 3% earnings rise in fiscal 2020).

A jumbo prospective dividend yield of 6.3% through to the end of next year isn’t enough to draw me in either. I see additional scope for Walker Greenbank’s share price to slide some more.

Yields rise to around 8%

In fact, I reckon Walker Greenbank shareholders may want to consider selling the business before that potentially-disastrous trading update and snap up some shares in Stobart Group (LSE: STOB) instead.

The boardroom shenanigans at the FTSE 250 firm have continued to dominate the financial newswires and overshadowed fresh news of strong trading at the support services business. I’m expecting another robust set of numbers when interim results are released on October 24.

In July, Stobart confirmed that it remains on track to hit the 5m-passenger-per-year landmark at London Southend airport by 2022, as well as its objective of freighting more than 3m tonnes of renewable energy fuel each year by this date. What’s more, it also repeated its goal of “realising value through disposal of our non-operating assets to support the dividend.”

Reflecting this drive to bolster the balance sheet, the City believes Stobart will be able to lift the dividend to 18.5p per share in the year to February 2019, despite an anticipated 84% profits fall. Moreover, the projected 96% earnings rebound predicted for fiscal 2020 supports estimates of a 19.1p reward.

These anticipated windfalls produce meaty yields of 7.6% and 7.9% respectively. And I am tipping yields at Stobart to remain impressive as the company makes good progress on its growth plans.

A forward P/E ratio of 45.7 times is expensive on paper, but in my opinion the firm is worth every penny.

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Royston Wild 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.

What’s more, the company has a relatively stable balance sheet with net gearing of only 9% and interest cover of 16.1 times. 

However, as today’s full-year results for release from the luxury interior furnishings group shows, Walker is facing significant business headwinds that will limit its growth going forward. 

Another warning 

Today the company reported a 20.2% jump in adjusted underlying profit before tax and 6.2% increase in earnings per share, mainly thanks to the acquisition of Clarke & Clarke, completed last year. 

With earnings rising, management has decided to hike the final dividend by 20.3% giving a total dividend for the year of 4.4p. But despite these upbeat headline figures, a more troubling trend is emerging in the underlying business. 

Following a profit warning in November, the company has today announced another warning on growth, noting alongside results that trading in the current financial year “reflects a difficult marketplace, particularly in the UK.” The statement goes on to say that “in the first nine weeks of the current financial year, brand sales were down 8.3% in the UK.” 

Unfortunately, international sales are not doing much to pick up the slack either. Overseas sales declined 6.1% in reportable currency. These figures reflect broader industry trends, and it is unlikely, in my opinion, that the business is going to see a sudden uptick in demand any time soon. 

With this being the case, despite Walker’s attractive valuation of only 8.7 times forward earnings, I would avoid it in favour of growth champion Howden Joinery (LSE: HDWN). 

A unique business model 

Howden is not immune to the headwinds affecting the broader retail industry, but it is better placed, in my opinion, to weather the storm. 

As I pointed out at the end of January, Howden’s business model is unique in that each of the group’s depots is run as an individual business where managers receive a significant share of the profit. This incentive model has helped the company grow profitably without over expanding or becoming involved in any costly price wars. It has also helped the business retain key talent. 

By putting staff in control, Howden has seen its net profit grow at a compound annual growth rate of 17% for the past five years, and its dividend to shareholders has increased at a rate of 30% per annum over the same period. Meanwhile, cash on the balance sheet has risen from £95m to just over £241m, enough to fund dividend distributions for three-and-a-half years if profit evaporated overnight. 

And while Walker is struggling in the current environment, at the beginning of March, Howden announced that the robust trading it had seen in 2017 (revenue growth of 7.1%) had continued into 2018. 

So overall, Howden looks to be the better income and growth investment even though shares in the company are slightly more expensive. The stock currently trades at a forward P/E of 14.3 and yields 2.6%. Nonetheless, in my opinion, it’s worth paying a premium to profit from its outperformance.

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Rupert Hargreaves owns no share mentioned. 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.

Indeed, for the six-month period to 31 July, sales jumped by nearly a third to £54.3m. This figure included a £10.3m contribution from Clarke & Clarke, the fabrics and wallpaper business acquired in October 2016. Adjusted operating profit before tax for the group as a whole hit £5.9m, compared with £3.8m for the first half of 2016/17.

On the back of these impressive first half numbers, for the full-year City analysts were predicting 16% growth in earnings per share to 15.9p and 105% growth in pre-tax profit to £14.3. 

Unfortunately, it now looks as if these numbers were highly optimistic. 

Skidding to a halt

Today, shares in Walker Greenbank have slumped by around 25% after the company warned on profits for the full-year. According to the press release from the firm, the upbeat selling conditions experienced during the first half, which were expected to continue have “not been sustained, ” and brand sales (excluding Clarke & Clarke) have “weakened significantly against management’s expectations.”

It seems the trading weakness stems from the firm’s largest market, the UK. The release notes that while overall sales are suffering, “brand sales are ahead of the same period last year” internationally. Management expects full-year licensing income to be up approximately 15% on a like-for-like basis. 

Overall, considering the disappointing UK Brand sales and the knock-on effect on manufacturing, Walker Greenbank expects that “profits for the year ending 31 January 2018 are likely to be approximately 10% lower” than its expectations. A 10% decline isn’t that bad on its own, but the company is only halfway through the critical autumn selling period, so there’s still scope for trading to deteriorate further. That said, there’s also scope for it to pick up in the final weeks of trading. 

Buy, sell or hold? 

How should investors react to today’s news and should you catch this falling knife? 

Well, as noted above, a 10% decline in expected profit is not a disaster. However, there is the chance that sales could slow further in the weeks and months ahead. I believe that this is the reason why the shares have sold off so heavily today. 

With this being the case, there is an air of uncertainty overhanging the company, and as a result, it’s difficult to place a value on the shares. 

When Walker Greenbank had a bright growth outlook, placing a value on the business, and its projected growth was relatively easy. But that’s all changed. The UK retail sector as a whole is facing headwinds in the shape of Brexit uncertainty, falling real wages and online competition. These factors are unlikely to dissipate for some time, which indicates to me that the company’s struggles could be just beginning. 

With an unclear outlook, I believe it might be wise to avoid this falling knife. 

The post Is this small-cap stock a falling knife to catch after collapsing 25% today? appeared first on The Motley Fool UK.

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Rupert Hargreaves owns no share 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.

One stop shop

For those of you who are unfamiliar with the group’s activities, the Cardiff-based firm happens to be the leading global supplier of advanced semiconductor wafers. The company’s products cover a diverse range of applications, supported by an innovative outsourced foundry services portfolio that allows the business to provide a ‘one stop shop’ for the wafer needs of the world’s leading semiconductor manufacturers.

The AIM-listed firm uses advanced crystal growth technology, known as epitaxy, to manufacture and supply bespoke semiconductor wafers (epiwafers) to the major chip manufacturing companies, who then use these wafers to make the chips which form the key components of virtually all high technology systems. But what I love the most is the fact that that the Welsh firm is unique in being able to supply wafers using all of the leading crystal growth technology platforms.

Huge potential

IQE’s products can be found in many leading-edge consumer, communication, computing and industrial applications, including a complete range of wafer products for the wireless industry, such as mobile handsets and wireless infrastructure, Wi-Fi, base stations, GPS, and satellite communications and optical communications.

There’s no denying the huge potential for IQE. A broad range of customer engagements across multiple technologies and end markets should provide a clear path to increase revenue diversity and accelerate growth over the coming months and years. But this promise of spectacular growth has powered the shares 300% higher over the past 12 months, and at 38 times forecast earnings that potential now looks to be well and truly priced-in.

Something to think about

For those in the market for an AIM-listed growth stock with a more down to earth valuation, then today’s interim results from Walker Greenbank (LSE: WGB) should certainly give investors something to think about.

The luxury interior furnishings group this morning reported a big leap in first half revenue helped along by last year’s acquisition of Clarke & Clarke. The Uxbridge-based group designs, manufactures and markets wallpapers and fabrics, together with a wide range of ancillary interior products.

Step change

For the six-month period to 31 July, sales were up 29.9% to £54.3m, including a £10.3m contribution from Clarke & Clarke, the fabrics and wallpaper business acquired in October 2016. Adjusted operating profit before tax was up by a massive 55.3% to £5.9m, compared with £3.8m for the first half of 2016/17.

The acquisition of Clarke & Clarke clearly shows a step change in Walker Greenbank’s performance during the first half, and I’m bullish on the longer-term prospects. Trading on a forward price-to-earnings ratio of 15, this is one small-cap growth stock I’d certainly consider ahead of IQE at this moment in time.

The post One small-cap growth stock I’d buy ahead of IQE plc appeared first on The Motley Fool UK.

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Bilaal Mohamed has no position in any 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.

City analysts expect the company to report further growth this year with revenue of £119.6m projected, and off the back of this growth, analysts are expecting an earnings per share rise of 16% to 15.9p. If the company hits these targets, pre-tax profit will have grown by around 190% in six years, and earnings per share will be up 70%. 

As earnings have expanded over the past five years, shareholders have reaped the rewards. Management has hiked the company’s dividend payout per share by 200% since 2013 and shares in the company have produced a total return of around 240% since mid-2012.

Further growth ahead? 

I believe Walker’s returns can continue as the company builds on its existing presence to reach new customers. In October last year management completed the acquisition of Clarke & Clarke, an innovative design, fabrics and furnishing company with an international presence. 

Thanks to this acquisition, sales for the six months ended 31 July 2017 grew 35.6%. Excluding the new business, on a like-for-like basis sales increased 3.6% in reported currency. International sales are growing at a double-digit rate. During the reporting period, sales in Europe and the US rose 11.9% and 12.9% in reported currency, but sales in the UK declined by 1.8%. More lucrative licence income rose 18% in constant currency year-on-year for the period.

Despite Walker’s impressive growth, shares in the company trade at a relatively modest valuation of only 14.7 times forward earnings and support a dividend yield of 1.9%. As the company continues to use its reputation to drive global organic sales, while acquiring additional bolt-on growth, the group should be able to expand for many years to come.

Growth through acquisition 

Like Walker, Portmeirion Group’s (LSE: PMP) reputation and bespoke products have helped it grow steadily over the past five years, and these traits should ensure that the group has many more years of expansion ahead of it.

Over half a decade, Portmeirion’s revenue has grown by 50%, and over the same period, earnings per share increased 40%. Over the next two years, City analysts expect the company to report earnings growth of 11% for 2017 and 9% for 2018. These are hardly the market’s best growth rates. But Portmeirion has a strong reputation that should allow the group to continue to grow steadily over many years, so as a long-term investment the firm looks highly attractive. Shares in the company currently trade at a forward P/E of 13.8 and support a dividend yield of 3.7%.

Portmeirion is also executing select acquisitions to boost organic growth. Thanks to the purchase of Wax Lyrical, the UK’s largest manufacturer of home fragrances, for the six months ended 30 June 2017, total group sales rose 16%. With net debt of only £2.3m at the of the end of 2016 and a bank facility of £21m, the firm has plenty of financial headroom for further acquisitions to drive growth.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Portmeirion 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.

Shareholders in my first company have seen their payouts increase by 200% since 2012 but my second firm has performed even better, delivering dividend growth of 256% over the same period.

Posh profits

Walker Greenbank (LSE: WGB) produces luxury wallpaper and fabrics for upmarket homes. The company’s British style attracts affluent buyers in markets all over the world. Last year, 30% of brand revenue came from Western Europe, 33% from the U, and 15% came from the Middle East and Asia.

The group said on Wednesday that brand sales have risen by 4.5% since the start of February. Europe and the US are outperforming the UK, where sales have been fairly flat. Despite this, chairman Terry Stannard said that both of the firm’s manufacturing sites have seen a “noticeable increase in export orders from new customers” and have “improving order books”.

Mr Stannard cautioned that it was “too soon to predict the strength of this trend”. Walker Greenbank could certainly suffer if a US or European recession hit spending among affluent customers. However, as yet there’s no sign of this. Management expects full-year results to be in line with expectations.

Broker forecasts suggest that Walker Greenbank will generate adjusted earnings of 15.4p per share this year, putting the stock on a forecast P/E of about 13. An 18% dividend hike is expected, pushing the payout up to 4.3p and implying a yield of 2.1%.

The stock looks affordable to me. The only risk is that market caution about consumer spending will continue to put pressure on the shares, which have lagged the market over the last couple of years.

A Brexit buy?

Kitchen manufacturer Howden Joinery Group (LSE: HWDN) was a big casualty of last year’s post-referendum sell-off. However, unlike housebuilding stocks, Howden hasn’t yet recovered. The group’s shares are still worth 15% less than they were before the UK voted to leave the EU.

There are two main risks for investors in the firm. UK consumer spending could slow, reducing demand for kitchens. A second more complex issue is that the weaker pound will affect the costs of the group’s raw materials and finished products, many of which are imported.

Like Walker Greenbank, Howden shares have performed poorly over the last couple of years. But for investors who believe the UK economy is likely to remain in reasonably good health, I believe this could be a buying opportunity.

Howden has achieved an impressive 18% operating margin in each of the last two years. Return on capital employed has averaged 43.7% since 2011, which is extremely high. This has enabled the group to fund its expansion without debt.

Its operations are extremely cash generative and the dividend has been covered comfortably by both earnings and free cash flow in recent years. An ongoing £80m share buyback should provide further support for the share price and dividend.

With a forecast P/E of 15 and a prospective yield of 2.6%, I believe Howden Joinery could be worth a closer look at current levels.

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Roland Head has no position in any shares mentioned. 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.