Landscape products supplier Marshalls (LSE: MSLH) delivered another set of stonking half-year results this morning, which is the type of trading outcome we’ve become used to from the firm.
Double-digit percentage increases in annual earnings have been a feature of the financial record for at least six years, and the share price has responded accordingly. Over the past seven years, the stock is up more than 600% at today’s 618p.
Good figures
And today’s figures are good too. Revenue in the first half the year increased by 15% compared to the equivalent period last year, earnings per share went 15% higher, and net cash from operations before movements in working capital shot up by 36%. That looks like well-balanced growth to me. The directors applied their own seal of approval by slapping 18% on the interim dividend.
Looking forward, the company said trading since 30 June “has remained strong”. The directors recently declared a new five-year strategy with the objective of delivering “sustainable growth”. Chief executive Martyn Coffey said in the report the strategy is underpinned by “strong market positions, focused investment plans and an established brand”. The directors are “increasingly confident” that Marshalls will at least achieve its expectations for the full 2019 year.
City analysts following the firm have pencilled mid-to-high single-digit advances in earnings for 2019 and 2020. But that’s anticipating a slowdown in growth because the advances of the past few years have been well into double-digits. However, my view is that Marshalls’ operations had been recovering from a cyclical low following the post-credit-crunch recession last decade, which would have accounted for much of the advance in earnings we’ve seen over the past few years.
But on top of that, the firm has been expanding organically and via acquisitions. Research & development and new product launches have played their part in the firm’s operational progress. There’s also been a keen management focus on execution and cost control.
A rich valuation
Yet I think the spectre of the cyclicality of the sector hangs over the stock now. With earnings growth slowing, could we be getting close to peak earnings for Marshall’s in the current economic cycle? Maybe. But I see little evidence of caution in the valuation. Indeed, with the shares at 618p the forward-looking earnings multiple for 2020 sits just above 20 and the anticipated dividend yield is a little over 2.5%.
Ignoring the potential cyclicality of operations for a moment, I think a valuation that high is rich even for an out-and-out growth firm that is expecting to increase its earnings by single-digit annual percentages ahead. It seems clear to me that a big part of the stock’s meteoric rise has been because of a valuation uprating.
So I’m wary of the stock because I see huge potential for the valuation to adjust down again. But I was cautious for similar reasons 16 months ago, and the share price has put on almost 50% since then! Nevertheless, I’m avoiding Marshalls now.