It’s well known that star fund manager Neil Woodford, for one, has become bullish on UK cyclical firms recently.
He’s been buying into big firms such as Lloyds Banking Group and British Land because he thinks the outlook for the UK economy is good and UK-facing cyclicals have seen their valuations pushed down too far.
Cheap, but rising costs
If you like his idea and you are looking for a smaller cyclical firm to invest in, I reckon Epwin Group (LSE: EPWN) takes a lot of beating. The firm manufactures windows, doors and plastic cladding products such as drainage pipes, composite decking, and stuff for finishing off around the roofline of buildings.
The valuation is low. At today’s 108p share price the forward price-to-earnings (P/E) rating runs at just over 7.4 for 2018 and the forward dividend yield sits around 6.5%. City analysts following the firm expect forward earnings to cover the payout just over twice.
As you might expect, there’s a reason for the firm’s lowly rating. Since the vote to leave the EU and sterling’s plunge, Epwin has been juggling increased input costs. Nevertheless, in May the firm told us that trading is in line with expectations, which according to City analysts following the firm means an increase in earnings per share of 2% this year and 3% during 2018.
Stalled growth in profits
Meanwhile, Pets at Home Group (LSE: PETS) is a specialist retailer of pet food, accessories, veterinary and grooming services. Its earnings have been lacklustre, with EPS coming in flat over the last couple of years and set to decline by 10% or so for the current year to March 2018, before flattening again the year after that.
The firm has been looking at its pricing and hopes that reductions in selling prices will rejuvenate profitable sales growth in the years ahead. Within the operational setup, the vet business is growing fast. In May, the firm reported in the full-year results that total income from joint venture vet practices grew almost 25% last year to £47.1m, which is around 10% of the level of overall gross profit. There’s also brisk progress on building up online sales.
At today’s 162p, share price the firm trades on a forward P/E rating around 12 for the year to March 2019 and pays a forward dividend yield of just under 4.6%. Forward earnings should cover the payout around 1.8 times.
The rollout rolls on
I think the reason for this low-looking valuation could be that Pets at Home is something of a rollout proposition with stalling profit growth. The net store count was up at 442 at the end of last year compared to 427 stores the year before.
During 2017, the firm is targeting the opening of 15 superstores, 50 vet practices and 50 grooming salons, although it’s unclear how many of those vet and grooming outlets will be standalone and how many within existing or new stores. Also unknown is how many, if any, stores will be closed during the year. Nevertheless, the rollout rolls on, and if Pets at Home can restore earnings growth the stock could make a decent investment at these levels.