Don’t you just hate it when a stock flies under your radar, and then you finally notice what’s happening and kick yourself for missing it? That happened to me Friday with Grafton Group (LSE: GFTU). I spotted its shares rising, up a couple of percent on the day, and took a closer look. And I see the Grafton share price has soared nearly 85% over the past two years.
So what is Grafton Group Units? The company supplies building materials and DIY products. And it seems they have been in big demand over the past year. That helped it to report a whopping 355% increase in adjusted earnings per share for the six months to 30 June 2021.
Revenue grew by 46%, and improving margins helped to accelerate the bottom line even further. Adjusted operating profit more than trebled to £157.8m.
The company’s liquidity situation is made a bit tricky by IRFS 16 rules, which include lease liabilities under debts. On that basis, Grafton ended the half with net debt of £209.9m. But excluding IFRS 16 leases, we’re looking at a net cash position of £302.5m.
These are record figures, and it’s a very pleasing outcome for shareholders. But what about investors looking at the company afresh, wondering whether there’s still a buying opportunity here? In other words, what about me? Should I be looking longingly at the Grafton share price, or should I keep a bargepole’s distance?
Fundamental valuation
Well, the share price is significantly elevated, after this year’s run. But what has that done to the valuation? Doubling up the first half earnings per share figure, the current 1,400p share price gives us a price-to-earnings multiple of approximately 14. That’s close to bang on the long-term average for the FTSE 100. The dividend yield, estimated on the same basis, is a bit low at 1.2%. But it’s covered around sixfold by earnings, suggesting there’s plenty of scope for accelerated dividends in the future.
This guesswork is based on a static second half, though. And analysts expect it to do better than that and for the growth continue. So a Grafton share price valuation based on annualising the first-half figures might fall significantly short.
Part of Grafton’s growth plan involves acquisitions, and there seems to be plenty of cash to pursue that. Saying that, I have seen too many companies come a cropper over the years by over-stretching themselves. Then when a slowdown comes, they find themselves in a pinch.
Grafton share price future?
For Grafton, I wonder how much of the growth is sustainable and how much is down to the pandemic effect. DIY demand did climb, and materials shortages have led to higher prices and fatter margins. Should the demand/supply balance shift, we could see falling prices putting a squeeze on margins again.
Saying that, for now at least, Grafton still looks like a tempting growth prospect on fundamental measures. I won’t buy based on this short inspection, or on one set of interim results. But I do intend to take a much closer look at the company.