Howden Joinery

I had been thinking about buying into timber merchant Howden Joinery (LSE: HWDN) for a while.

The investment case is strong in my opinion. By developing relationships with trade customers, the company is able to attract repeat custom often with substantial sales volumes. The nature of the business and transportation costs means that Howden’s national network of local depots can help give it a cost advantage over farther flung suppliers. It has proven its business model can be very profitable.

Worries about a declining housing market have hit its shares hard, though. They have fallen 44% in value over the past year and now trade on a price-to-earnings ratio in single digits.

I recognise that a fall in house sales could hurt revenues and sales. But I expect renovations of existing properties to help support sales. In the long term, I reckon Howden’s robust business model could support a higher share price again.

JD Sports

I already owned shares in JD Sports (LSE: JD) before October.

Owning shares and watching them decline can cause investors to behave emotionally. JD’s decline of 55% over the past year is even worse than Howden’s.

That reflects concerns about management changes at the FTSE 100 retailer as well as the risk of inflation eating into profit margins. On top of that, if consumer discretionary spending falls, the market for sportswear could decline, hurting sales.

But as a long-term investor, I aim to behave rationally not emotionally. I take a similar view to JD as I do when it comes to Howden. I expect strong long-term demand in its market space. Within that space, it has an attractive position thanks to a large customer base, established brand, and proven business model.

Those assets could help support the business, which expects to deliver results this year in line with last year’s all-time record figures. I happily used the falling JD Sports share price as a buying opportunity for my portfolio.

Legal & General

A FTSE 100 share I had owned previously but no longer held coming into October was financial services provider Legal & General (LSE: LGEN).

But I saw a fall in the Legal & General share price as an opportunity to add the company back into my portfolio – and pounced on it. The shares are 20% lower than they were a year ago.

A worsening economy could hurt investment returns for the company. If that happens it may lead to sales and profits shrinking. But in the long term, I think the firm’s financial services expertise could help it attract and retain customers. It has a large customer base and very strong brand thanks to its multi-coloured umbrella logo.

Legal & General’s dividend yield of 7.9% is higher than many FTSE 100 peers. It should make the shares a useful addition to my passive income streams.

That pain could come in November.

Howdens Joinery

One FTSE stock that could have a difficult month is kitchen supplier Howdens Joinery (LSE: HWDN).

Now, I’m actually a fan of this company. It’s a big player in its market and has a history of generating above-average returns on the money it puts to work.

Unfortunately, it’s easy to overlook these qualities in the current climate. With inflation running high and a housing market now treading water, demand must surely have softened over the summer. We’ll find out when it reports on recent trading on 3 November.

The question is, how much of this is already priced in? Well, the near-halving of Howden’s share price in 2022 would suggest quite a bit. Interestingly, there also seems little interest from short sellers as things stand. This suggests that expectations might actually match reality. If so, there’s no guarantee that we will see another drop next month.

That said, I’m prepared to wait for the numbers before deciding whether to strike.

Marks and Spencer

Interim results from Marks and Spencer (LSE: MKS) will be published on 9 November. Like Howdens, its stock has tanked in value year-to-date.

I can’t say I’m surprised. Having almost overcome the challenge of shaking its tired image, the tightening of purse strings is another hurdle for the business. News that inflation returned to double-digits in September is hardly an encouraging development. A recent update from Ocado (its joint venture partner in the UK), and the reaction to it, don’t bode well either.

On the flip side, the shares look cheap, changing hands at a price-to-earnings (P/E) ratio of a little less than seven. One might also argue that M&S stands to benefit from fewer people eating out but perhaps spending a little more on eating in. And, no, I don’t believe every M&S shopper has suddenly migrated to shopping at a German discounter for their groceries.

Even so, I can’t see a catalyst for a recovery to begin in November. For this reason, I’m happy to watch from the sidelines.

AO World

Down 57%, as I type, electrical goods seller AO World (LSE: AO) has been another big casualty in 2022.

With interim results out on 22 November, I just can’t see how management has been able to turn this still-not-consistently-profitable business around. Like M&S, AO operates in a hyper-competitive environment. And while white goods and gadgets need to be replaced from time to time, many people will avoid doing so in a recessionary environment unless completely necessary.

It seems I’m not alone in being bearish. Broker Canaccord Genuity currently has a ‘sell’ rating on the stock with a target price of just 31p. It’s currently 45p.

Management is clearly trying. The decision to leave the German market and concentrate on the UK, while overdue, does make a lot of sense.

Even so, I still can’t see the attraction of me investing here. They don’t make bargepoles long enough.

The stocks are Howden Joinery Group (LSE:HWDN) and Forterra (LSE:FORT). Each has a solid balance sheet, a price-to-earnings (P/E) ratio under 10, and a dividend yield around 4%.

Furthermore, I think that both stocks have an economic tailwind behind them. Rising interest rates are, I think, likely to help both businesses.

Rising interest rates

Interest rates in the UK have been rising sharply lately. The Bank of England base rate is now 2.25%, having been at 0.1% a year ago.

Mortgage rates have been increasing as interest rates in general rise. The average interest rate on a two-year fixed mortgage is now 6%, up from 1.2% a year ago.

Taking out a new mortgage to buy a bigger house is therefore more expensive than it was. As a result, demand for mortgages has fallen and the UK housing market has been slowing down.

I think that higher mortgage rates will lead to more people choosing to spend money improving their existing houses. In my view, this could be positive for both Howden’s and Forterra.

Howden Joinery Group

One way of improving an existing house is by installing a new kitchen. That’s where Howden Joinery Group comes in.

Howden’s supplies kitchen appliances, materials, and fixtures to the building trade. So I think that it stands to do well if there’s an increase in demand for kitchen improvements.

Compared to the cost of moving, the cost of improving a kitchen is relatively low. This is especially true while mortgage rates are high.

One of the challenges that the business has to contend with is inflation. Higher prices for raw materials are likely to increase the company’s costs.

As I see it, though, the inflationary headwind is subsiding somewhat for Howden’s. The price of lumber, steel, aluminium, and copper are all lower than they were a year ago.

That’s why I think that Howden’s can do well in the current environment. As higher interest rates in the UK might drive demand for their products, I’d happily buy the shares today.

Forterra

Another way to improve an existing house is by building an extension. This is Forterra’s line of business.

Compared to installing a new kitchen, building an extension is expensive. But for people looking for more space, it’s still likely to be cheaper than moving house.

Forterra’s main product is bricks. One of the downsides for this company is that slowing demand for houses might mean slowing demand for bricks as new building work slows down.

But I don’t think that this is a big problem. Forterra owns the London Brick Company, which the company estimates is used in around 25% of UK housing stock.

This is significant. For someone looking to build an extension, it’s important to have bricks that match the ones used in the existing structure.

As such, I expect Forterra to benefit from an increase in demand for extensions. And I’d be willing to invest £500 into the stock today as a result.

With a regular investment in mind, here’s how I’m going to deploy £100 per month.

Surging profit

The first business I’m looking at is National Express (LSE:NEX). The shares are currently trading at 193p. In what has been a difficult period for the travel industry, the coach firm reported that group revenue rose over 33%, to £1.32bn, for the six months to 30 June.

Additionally, operating profit grew nearly 300% during this time to £90.5m. What this tells me is that demand appears to be recovering within this sector, to the benefit of the company.

What’s more, the business is starting to focus again on growth and expansion. It secured 16 new contracts, mainly in North America, that could bring in revenue in excess of £150m annually. 

This is part of the firm’s £2.1bn investment into expanding operations in the UK and North America. 

However, there is the threat posed by inflation. This may increase costs and, ultimately, lead to shrinking profit margins. Further pandemic variants, should they arise, could also dent demand for travel.

Despite this, the business has operating cash flow of £179m. This tells me that it should be able to survive any short-term issues that come to fruition. 

Solid income?

Secondly, I’m interested in Howden Joinery (LSE:HWDN). In 2021, the houseware-fitting services firm paid a dividend of 19.5p per share. That’s equivalent to a dividend yield of 0.79% at the current share price of 567p. 

While this may seem small, it’s good to know that I could derive income from my monthly investment. I’m aware, though, that dividend policies can be subject to change.

The business reported improved results for the six months to 12 June, with group revenue up 16.3%. In addition, pre-tax profit grew 21.6%, coming in at £145m. Another indication of Howden’s financial strength is its cash balance of nearly £250m.

However, the price of raw materials is continuing to climb on account of a tighter market and supply disruptions. This may lead to smaller profit margins.

On the other hand, the firm declared an interim dividend of 4.7p per share. This is a 9.3% increase year on year, and gives me continued confidence that income from this investment could be consistent.

Overall, both of these companies have performed well in challenging environments. To that end, I think they could be good homes for put my money on a regular basis. I’ll therefore add the shares of each business every month with £100.

The company is Howden Joinery (LSE:HWDN). It’s a designer and supplier of fitted kitchens, selling the necessary materials to tradesmen across the United Kingdom and France.

Given we’re in the middle of a consumer spending slowdown, investing in what amounts to a home renovation business may seem nonsensical. So let’s explore exactly why I think now is the best time to buy, despite the seemingly unfavourable environment.

One of the best shares to buy now?

The business generates revenue by offerings its kitchens to new home builders. However, the majority of top-line income actually originates from households seeking to renovate.

When inflation is going through the roof I, like many, assumed that this sort of business wouldn’t fare too well. After all, fitting a new kitchen is expensive, and with energy bills going through the roof, most households are looking to cut costs wherever possible. And that’s probably why the FTSE 100 stock is down 41% in the last 12 months.

However, it seems someone forgot to tell Howden Joinery because its latest results continue to deliver record-breaking performance. In the last six months, revenue hit a new mid-year high of £913.1m, up 16.3% versus a year ago and 39.9% compared to pre-pandemic levels.

Inflation has been driving up the cost of raw materials. Yet management has had little difficulty passing this cost onto customers to the point that profit margins are actually improving. Subsequently, operating profits came 20% higher than in 2021, which led to a 9.3% raise in its dividend.

The group opened 10 new depots while revamping 34 older ones here in the UK. It also continued its international expansion into France with seven new depots. In total, Howden now has 788 sites serving approximately 20% of the UK’s estimated £11bn kitchen materials market.

Knowing the risks

I think Howden Joinery may be one of the best shares to buy now. But that doesn’t make it a risk-free investment. The group has proven to be resilient against macroeconomic factors so far. But suppose households continue to face spending pressure due to rising living costs or a potential recession. In that case, home renovation projects may start getting delayed.

Another threat to consider is supply chain disruptions. Howden Joinery is a vertically integrated business. But it still has to source the raw materials needed to manufacture the components it sells to tradesmen. Its customers tend to operate on a short cycle, so any unavailability in inventory can result in lost projects.

But given the group’s long track record of outperformance, management defying short-term expectations, and a valuation that looks dirt-cheap at a P/E ratio of 10, I believe the potential rewards far outweigh the risks. And that’s why I’m now a shareholder.

With that in mind, I’ve spotted two stocks that seem like no-brainer buying opportunities, even if I only had as little as £100 to invest. Let’s take a look.

One of the best UK shares to buy now?

XP Power (LSE:XPP) has had a tough run of late, with the share price tumbling by over 60% in the last 12 months.

As a quick reminder, the business is an electronics components manufacturer that works directly within the engineering, medical, and semiconductor manufacturing industries. So it shouldn’t be surprising that the disruptions to global supply chains have created many headwinds for this business.

Revenue growth has stalled while the order book and lead times continue to build. Sourcing raw materials is proving to be challenging. Even more so, given its manufacturing facilities are located in China, where strict Covid-19 policies are still in effect. To add more fuel to the fire, its competitor Comet Technologies accused XP Power of stealing trade secrets which a US jury awarded $40m in damages against the firm.

With all that in mind, watching these UK shares get sold off isn’t all that shocking. But while these developments are frustrating, the long-term strategy of this business ultimately remains uncompromised. At least, that’s what I think.

Management is still proceeding with its facility expansions to bolster manufacturing capacity once supply chain disruptions have ended. It has £189.2m in liquidity to work with versus only £105.8m in short-term liabilities. And while the $40m legal bill isn’t a pretty sight, it’s ultimately a one-time expense.

In the short-term, further volatility in the XP Power share price may continue. But as a long-term investment, this looks like a no-brainer buy for my portfolio, despite the risks.

Stock Pick #2

Another British business hit hard recently is Howden Joinery (LSE:HWDN). Shares of the UK kitchen materials supplier have tumbled nearly 40% over the last 12 months. And it’s not difficult to understand why.

With consumer spending for discretionary items like home renovation steadily declining and the house building industry beginning to slow, many investors expect Howden Joinery to follow suit.

But looking at the latest results, it seems someone forgot to tell the company. Because revenue continues to grow by double-digits, profit margins are climbing despite inflationary pressures, and the firm is capturing greater market share through expanding its depot network.

Management has admitted that if the housing market or consumer sentiment continues to suffer, maintaining its current momentum could prove challenging. This is obviously a significant risk to consider before making an investment decision.

Yet, with a P/E ratio of just 10 and a tasty 3.4% dividend yield, these UK shares look like a bargain, in my eyes. That’s why I added them to my income portfolio last week.

Now, the fact that a stock is down doesn’t automatically mean that I should be interested in buying it. It might have further to fall, or it might have gone from being extremely overpriced to just being moderately overpriced.

But lower share prices can bring with them buying opportunities. And one of the few things in investing that is certain is that buying the same stock at a lower price means better long-term returns and higher dividends.

With that in mind, I’ve found two UK dividend stocks that I think are particularly interesting. I’d be interested in buying either of them in September.

Endeavour Mining

Top of my list is Endeavour Mining (LSE:EDV). The stock has been up and down over the last few months, but it’s down at the moment, with shares 11% lower than they were three months ago, meaning that the dividend yield is around 3.6%.

The company owns and operates a number of gold mines across Africa. That brings with it a degree of risk – Endeavour’s mines are located in countries that can be politically unstable. 

But the result of this is that the company has extremely low costs associated with its operations. In my view, this more than offsets the political risk.

I once heard Warren Buffett say about oil that anybody can make money when prices are high. What really matters is the ability of someone to find sources of oil that can be extracted at a low cost.

As I see it, the same is true of gold. That’s why I think that Endeavour Mining’s low cost of production gives the business an important advantage and why I’m looking at buying the stock for my dividend portfolio in September.

Howden Joinery Group

The other UK stock I’m looking at is Howden Joinery Group (LSE:HWDN). The company supplies kitchens and appliances to the trade market.

Howden’s stock has fallen quite sharply – the shares are down 18% over the last month. Zooming out, things don’t look much better, with the stock down over 40% since the beginning of the year.

The reasons for the stock’s decline are straightforward enough. As consumer budgets become stretched, spending on new kitchens and other large non-essential purchases typically declines.

I think that the market is missing a trick here, though. Rising interest rates are making mortgages more expensive and I expect that this will slow the property market as buyers decide to stay put.

This, I think, is going to cause more people to improve their current houses, rather than buying new ones. If I’m right about that, then business might well remain strong for Howden’s over the next few years.

In my view, the risks with this stock are outweighed by the rewards. I think that the 3.59% yield makes this an attractive dividend stock at current prices – I’d be happy buying its shares for my portfolio.

Fallen star

The share price of trainer and sportswear retailer JD Sports Fashion (LSE: JD) has been out of form in 2022, so far. In fact, the company’s value has almost halved. This smells of ‘opportunity’ for me.

To be clear, I don’t think the market has got this wrong. JD is always likely to fare badly when discretionary incomes are squeezed. At times like these, a new pair of expensive Nike or Adidas trainers aren’t quite so essential.

There are other factors. Investors don’t seem convinced by ex-B&Q man Régis Schultz taking the top job. And being forced to sell the Footasylum brand for far less than what it paid for it doesn’t exactly inspire confidence.

Priced in?

But how much of this is reflected in the price of the shares? I reckon quite a lot. As I type, JD trades on a price-to-earnings (P/E) ratio of just nine. That’s cheap compared to UK shares as a whole and still reasonable for the consumer cyclical sector.

So long as next month’s update shows the company is hitting its already-conservative targets (and expectations aren’t revised again), I think this could prove a bargain… in time. Perhaps drip-feeding my money might be appropriate here.

Quality stock

Another stock I’d buy is kitchen supplier Howden Joinery (LSE: HWDN). Again, this may seem like an odd choice given the state of consumer confidence at the moment. Like JD, investors have been fleeing the shares en masse. The company’s value is down almost 40% in 2022.

Personally, I find the investment case here even more attractive. In addition to its strong market share in an arguably niche market, Howdens regularly achieves high returns on the money it invests in its business.

It’s this (otherwise known as ROCE or return on capital employed) — not earnings over three, six or 12 months — that ultimately allows a company to compound in value over time. It’s this that master investors like Warren Buffett and Terry Smith pay more attention to.

The shares now change hands for 11 times earnings. As tempting as that sounds, this valuation could still come back to bite me if we have a nastier-than-expected recession on our hands. So, yes, there’s still risk here.

On the flip side, there’s a secure-looking 3.4% dividend yield in the offing. That’s obviously not enough to offset inflation. However, being paid to wait is better than not being paid at all.

Buy now, profit later

How long will that wait be? No one knows. But remember that the market is forward-looking. By the time we get confirmation that the economy has turned the corner and thriving again, share prices will already be higher. Hence my interest in at least starting to buy these stocks now.

Profitable investing can be achieved without timing the markets perfectly. Instead, I need to invest with a margin of safety that’s sufficient to swing the odds of a good outcome in my favour.

Having fallen so far, I think this could be the case with these UK shares.

According to Ben Laidler, Global Markets Strategist at eToro, “the biggest casualty is likely to be asset manager Abrdn“. Shares in this FTSE 100 firm have fallen by more than 40% over the last year.

If Abrdn is demoted to the FTSE 250, its 9.5% dividend yield could make it one of the highest-yielding shares in the mid-cap index. However, Abrdn’s payout isn’t covered by forecast earnings and I’m unsure how safe it might be.

Abrdn isn’t on my radar as a potential buy today. But I am interested in two of the other FTSE stocks flagged up by Laidler.

He thinks “other potential casualties are generic drug maker Hikma Pharmaceuticals (LSE: HIK) and kitchen-maker Howden Joinery Group (LSE: HWDN)“.

I’ve followed both companies for years and have a good opinion of them. Although they’ve often looked expensive to me, both stocks have fallen by around 35% so far this year. I think Hikma and Howden could be good long-term buys.

Hikma: temporary setback?

Hikma’s share price has now fallen by more than 50% since last summer. Much of this slump has been caused by problems in the group’s generics division. This produces cheaper alternatives to branded medicines whose patent protections have expired.

Generic sales this year have been hit by new product delays and tougher competition in key US markets. As a result, Hikma cut its profit guidance earlier this year. The group’s CEO resigned soon after.

However, Hikma’s injectables and branded medicine divisions are still performing well. At a group level, Hikma is expected to report flat sales and only a small decline in profit in 2022. Operating margins are expected to remain above 20%.

Hikma is currently being managed by executive chairman Said Darwazah. He’s a member of the company’s founding family, which owns 27% of its stock. I think Darwazah will be motivated to deliver a turnaround.

In the meantime, Hikma shares are trading on just eight times forecast earnings, with a 3.4% yield. I think that’s probably too cheap.

Howden: director share-buying

It looks to me like Howden Joinery may avoid being demoted and keep its place in the FTSE 100. But whatever the outcome, I think this successful growth business is starting to look like an attractive investment.

Howden’s business is built on offering an excellent service and supplying trade customers only. The company’s local branch managers are given plenty of freedom to build direct relationships with customers, in exchange for hitting commercial targets.

With the shares down by around 35% from last year’s record highs, Howden is now trading on around 11 times forecast earnings, with a useful 3.4% dividend yield.

Finance boss Paul Hayes already seems to have been tempted by the reduced share price. He’s spent more than £100,000 buying shares so far this year, including a £48k purchase earlier in August.

The big risk is that sales could slump next year if the UK suffers a full-blown recession. However, there’s no sign of problems yet and the share price already reflects a more cautious outlook. I think the shares could be a good buy in September.

No proposal has been formally made, but I’d note that Schneider already owns almost 60% of Aveva. Given the majority shareholding, my view is that this deal is likely to go ahead.

Aveva share price: too late to buy?

But what now? Is it too late for me to buy the shares?

As a long-term investor, I tend not to get involved with takeover news. Although the Aveva share price could rise further, I’d rather focus on other Footsie shares that might look attractive to suitors in the future. As such, I won’t be buying Aveva shares today.

But there is one FTSE 100 stock that I would buy.

FTSE 100 top pick

I’m referring to Howden Joinery (LSE:HWDN). Its shares are looking particularly attractive to me right now. Note that its share price has fallen by over 30% in the past year. Given the cost-of-living crisis and expectations of a housing downturn I’m not too surprised to see it tumble.

But the shares are now at levels seen three years ago, and I reckon it could be a good opportunity to buy some for my Stocks and Shares ISA.

Howden is a well-known kitchen supplier. It uses a distinct business model that focuses on the relationship with builders and fitters. By doing so, it creates repeat custom.

It also enables the business to streamline its structure and allows it to operate at low cost. That’s particularly the case when comparing it with competitors that require large and expensive showrooms.

Impressive metrics

It’s this model that gives Howden some impressive metrics. For instance, it has a return on capital employed of almost 30% and a profit margin of nearly 20%. In addition to a 3% dividend, these are impressive numbers that highlight the quality of its business.

It recently delivered a strong financial performance, well ahead of pre-Covid levels. And it looks like it is effectively managing through inflationary and supply chain pressures.

I do need to bear in mind that these pressures are ongoing. Any weakening consumer confidence could impact the demand for kitchens over the coming months. The Bank of England is expected to raise interest rates further this year, and the impact this has on the housing market and Howden’s business is uncertain.

That said, this is a resilient, profitable, and cash-generative business. With a price-to-earnings ratio of just 11 times, I’d say it’s also cheap. Lastly, it’s trading at an attractive share price, and I’d expect it to double within the next year or two.

That’s why I’d ignore the Aveva share price today and buy Howden Joinery instead.