Wickes share price slumps after HY results

As a quick reminder, Wickes is a home improvement retailer with over 200 store locations in the UK. It sells to consumers and the building trade alike with products such as DIY supplies, gardening products, and other home improvement products.

So what’s the current state of play with Wickes shares? As I write, they’re trading for 138p. They slumped 20% yesterday after mixed results were released. Looking back further, the stock was trading for 254p at this time last year, which is a 45% drop over a 12-month period.

Mixed results and outlook ahead

So let’s take a look at Wickes’ half-year results posted yesterday. The first thing that stood out, and probably had the biggest impact on the Wickes share price falling, was the fact its revised profit forecast of £72m-£82m for the full year was lower than the previously forecast £83m.

I believe this due to a couple of reasons. Current macroeconomic headwinds, such as soaring inflation and rising costs could have a material impact on profit margins as well as performance and returns. Furthermore, the current cost-of-living crisis caused by these headwinds could see demand for products fall. Again this would affect performance profit levels. During economic volatility such as we are seeing now, consumers may not prioritise DIY and home improvement projects.

There were some positives from the trading update, however. Wickes said that sales compared to the same period were up. Furthermore, comparing sales over a three-year period, sales were up over 20%. Furthermore, it has a strong balance sheet and a healthy order book moving into the second half of the trading year.

My verdict

I can understand why the Wickes share price fell sharply yesterday and has been falling for some time. Macroeconomic issues out of its control are having a detrimental impact on performance, demand, and investor sentiment.

On the other side of the coin, I see some potential in Wickes. First of all, I don’t see the issues noted above being longer term. Next, infrastructure spending is set to rise in the coming years and retailers like Wickes should benefit. A prime example of this is the surge in house building in the UK linked to demand for homes outstripping supply.

Looking at Wickes’ fundamentals, the shares look cheap currently on a price-to-earnings ratio of just six. Furthermore, they would boost my passive income stream through dividend payments. It is worth noting that dividends are not guaranteed, however.

My investment strategy has always been to buy and hold for the long term and Wickes strikes me as a bit of a contrarian buy. At such cheap levels, I view adding a small number of shares to my holdings as a small risk. I am fully expecting some further bumps in the road, however.

Revised profit outlook

In the results, the big point was that the company now expects pre-tax profit to be in the £72m-£82m range. This is a revision lower from the £83m previously stated.

Part of this revision is due to the uncertain demand that the company faces from consumers. Wickes is a well-known DIY retailer, and has a large base of clients.

Although I wouldn’t call the products expensive, carrying out new DIY projects in the current economic backdrop isn’t something I would imagine is high up on people’s agendas. The mentality of making-do with what I’ve got it is more in line with my thinking, rather than an urge to redo my bathroom. What this boils down to is that during tough economic times, people are unlikely to want to commit to spending on new projects.

Lower demand ultimately leads to lower profit, which is exactly what Wickes is forecasting could happen.

Cost inflation biting

In the report, it noted that “we continue to manage supply chain inflation responsibly by passing through cash cost increases while maintaining our leading price position.”

Even though this is being contained at the moment, inflation is forecast to rise even higher (into double-digits) at the end of the summer. Therefore, I think investors are concerned about the implications of this for Wickes.

The comment also doesn’t fill me with confidence about how it’s being handled. If it passes cost increases to customers, demand will decrease as goods are more expensive. It can’t maintain the position of being the cheapest if it keeps raising prices.

An alternative is to take the hit on inflation at the business side and not pass it on. Yet this would increase costs and reduce profit margins. Either way, it’s not good.

Limited positives for the Wickes share price

It wasn’t all gloomy reading for shareholders. Total sales were up 0.8% versus the same period last year. On a three-year comparison, sales jumped 23.4%.

The business also spoke of the strong balance sheet and solid order book that it has going into H2. Therefore, even if the outlook isn’t rosy, the company is at least in a good position as it heads into the storm.

Ultimately, the contents of the report have caused a knee-jerk move lower this morning. Even though it contained some good news, I don’t think it’s a company that I want to be investing in at the moment.

Wickes is a home improvement retailer and garden centre business that operates more than 200 stores throughout the UK. It sells building and DIY supplies and materials to homeowners as well as the building trade.

It demerged from Travis Perkins last April and listed on the FTSE All-Share. Newly-listed UK shares are often labelled risky usually due to a lack of history and trading information but this is not the case for Wickes. It’s an established, profitable business with years of trading and financial information available.

Wickes shares reached as high as 288p on their first day of trading but have moved lower and not reached such heights since. As I write, the shares are trading for 198p. At this time last year, they were at 263p, so the stock as seen a 24% decline over a 12-month period.

These shares come with risks

Wickes shares have two main risks currently, in my opinion. Both are linked to the macroeconomic landscape domestically and internationally.

Firstly, rising costs and supply chain issues have placed pressure on many businesses providing traditional goods, such as home improvement materials. The supply chain issues have led to issues with sales, and rising costs are eating away at profit margins. This could affect the bottom line and any shareholder returns.

Next, rising inflation has put pressure on the cost of living. Demand for DIY and home improvement products may decrease as consumers are more concerned with paying bills and day to day living expenses. This could hurt the Wickes performance and returns.

It’s worth noting that there are many UK shares facing the aforementioned risks, and Wickes isn’t alone here.

Why I’d buy Wickes shares

The business has a good track record of recent and historic performance. I do understand that past performance isn’t a guarantee of the future, however. Wickes released excellent results for the year ending 31 December 2021 just last month. It reported revenue, like-for-like sales and profit all up compared to 2020 levels. In addition to this, it declared a final dividend of 8.8p per share. As a passive income seeker, UK shares that pay dividends are a must for my holdings.

Wickes shares look cheap to me on a price-to-earnings ratio of just 8. In addition to this, the current dividend yield is over 4%. This is higher than the FTSE 100 average of 3%-4%.

The firm has made significant progress in increasing its trade customers in recent times. Demand for housing, which is currently outstripping supply, will benefit firms like this that sell essential materials and products for the building boom in the UK. This should boost Wickes’ bottom line and shareholder returns.

Overall I’d happily add the shares to my portfolio. This is one of a number of UK shares I have had my eye on and with the recent price drop, mainly due to macroeconomic factors out of its control, it looks cheap. As a bonus, it pays a dividend to offer me a passive income stream too.

Wickes is a fairly new listing on the London Stock Exchange after it completed a demerger from Travis Perkins back in April. The share price hit a high of 288p on the first day of trading, but has drifted lower since. Before the update on Friday, the share price had dipped to 215p.

Has the trading update marked a turning point for the stock? Let’s take a look to see if it’s a buy for my portfolio.

Wickes and a demerger

Wickes is a major home improvement retailer in the UK. It describes itself as a digitally-led and service-enabled company that offers customers choice, convenience and value. Over recent years, it has rebalanced its business to service three types of customers it defines as: “Local Trade, Do-It-For-Me and DIY retail.”

When Wickes listed on the London Stock Exchange as a spin-off from Travis Perkins, it didn’t raise any new capital as part of the listing. Travis Perkins shareholders received shares in the newly listed firm, and had the option to either retain these shares, or sell them once trading began. This can sometimes place downward pressure on the share price of a spun-off company as shareholders opt to sell the shares and retain the original company in their portfolios.

The share price surges

It’s easy to see why the share price rallied on Friday. The company said trading has been resilient and raised its outlook for profit in fiscal/calendar year 2021. Revenue was actually in line with expectations, but margin performance was strong, which led to the upgrade in profit guidance.

I view this as a particularly good performance given the supply chain issues that most businesses are experiencing today. It signals that management is able to navigate supplier relationships very well, and that its business model is adaptive to these risks.

Is Wickes stock a buy?

I view the recent listing positively. Sometimes new companies that list via IPO have short histories, or require equity capital to invest for growth. This increases the risk of outright loss for a potential shareholder. However, Wickes is profitable with a longstanding history, which does de-risk the investment in my view.

There are still risks to consider though. For a start, there’s no guarantee that the management team will be able to mitigate supply chain issues indefinitely. Then, any slowdown in the UK economy will likely reduce demand for home improvement supplies.

However, I think the recent weakness in the Wickes share price reflects the selling pressure after the spin-off completed. The valuation looks compelling now as the shares are priced on a forward price-to-earnings ratio of only 10. I’ll be looking to add Wickes shares to my portfolio.

Playing the e-commerce explosion

I’d buy Wincanton (LSE: WIN) shares to try and make big money from the e-commerce boom. City analysts are predicting solid and sustained earnings growth at the warehouse and distribution services provider as online activity rises and parcels volumes increase.

Current consensus suggests bottom-line rises of 10% and 12% for the next two fiscal years are due. I find these forecasts particularly attractive as they leave the business trading on a forward price-to-earnings (P/E) ratio of just 10 times.

Wincanton is making great progress in exploiting the etail boom and last week it announced revenues increased 19% during the six months to September. Also last week, the logistics giant said it had inked a major contract with ABF-owned Primark that’ll see it make 50,000 deliveries over five years.

Even though driver shortages are creating a problem today, I think this cheap UK share is a great long-term buy.

DIY MVP

Sticking with the W’s, Wickes Group (LSE: WIX) is another ultra-cheap British stock on my shopping list today. Trade is booming here as a strong housing market and soaring home improvement spending catapults demand for its DIY products. Latest financials in October showed like-for-like sales up 16.9% in the September quarter versus the same three months in 2019.

Okay, comparable sales were down 1.6% year-on-year. But I think this was a solid result, given the strong results a year earlier when people spent abnormal amounts of time decorating their homes during Covid-19 lockdowns.

My main concern is not whether DIY spending will continue growing robustly as the decade progresses. It’s that the likes of Wickes face increasing cost pressures that are damaging profit margins.

Still, at current prices, I believe the retailer is hard to ignore. City analysts think earnings here will leap 21% and 41% in the next two fiscal periods respectively. As a result, Wickes trades on a forward price-to-earnings growth (PEG) ratio of 0.8.

Here comes the sun

I also think getting in on the green energy revolution is a good idea as demand for low-carbon electricity soars. This is why I’d buy Foresight Solar Fund Limited (LSE: FSFL), an investment company that invests in solar farms in the UK, Spain and Australia.

Foresight Solar’s collection of solar PV assets isn’t the only reason I like this cheap UK share however. The former penny stock also owns a 50% stake in the Sandridge Battery Storage after acquisition action in the spring.

This represented the company’s first foray into the battery storage market and more action on this front can be expected. Battery storage assets are essential in letting power suppliers balance energy supplies, and they play a critical role in the fast-growing renewables sector. I’d buy Foresight Solar despite the huge costs it incurs to keep its solar farms running.

G A Chester: Gamma Communications 

Gamma Communications (LSE: GAMA) is in the high-growth market of unified communications as a service (UCaaS) for businesses. Whether employees are in the office, at home, in a coffee shop etc, the company’s products enable them to communicate in multiple ways with colleagues and customers. Need I say more than ‘hybrid working’? 

Gamma is a UK leader but has also recently entered Europe where cloud-based UCaaS is at an earlier stage. There’s risk in this expansion abroad, but huge potential. Gamma’s shares may have overheated through the summer and I see a recent pullback as an opportunity for me to buy. 

G A Chester has no position in Gamma Communications.

Charlie Keough: F&C Investment Trust  

My best stock for October is F&C Investment Trust (LSE: FCIT). The FTSE 250 stock, with over £5bn in assets, has performed solidly year-to-date. 

The trust offers access to an array of sectors in numerous locations, all with cheap ongoing charges. I specifically like its relatively large weighting in emerging markets. Its long-term investment strategy is also an appealing factor. 

Launched in 1868, this trust has stood the test of time. Its 70% return (at the time of writing) over the past five years show that FCIT is a solid long-term investment to buy in October.  

Charlie Keough does not own shares of F&C Investment Trust. 

Rupert Hargreaves: Wickes Group

Wickes Group (LSE: WIX) is one of the primary beneficiaries of the home improvement trend that has evolved over the past 12 months. Over the 26 weeks to the 26th June, sales jumped 22.4% compared to 2019 levels. 

Management seems to think this trend will continue, and it is reinvesting windfall profits back into the enterprise to improve the customer experience and digital proposition.

As customer demand remains elevated, I would buy the shares for my portfolio.

However, challenges such as rising wages and materials shortages may prove to be a thorn in the company’s side as we advance.

Rupert Hargreaves does not own shares in Wickes.

Edward Sheldon: Gamma Communications

My best stock for October is Gamma Communications (LSE: GAMA), which specialises in remote work solutions. Its share price has fallen recently and I think this has created a nice entry point for long-term investors like myself.

Gamma’s recent first-half results were good. Revenue was up 23% year on year while adjusted earnings per share were up 30%. The dividend was increased 13%.  Looking ahead, Gamma said it was “optimistic” about future growth.

Gamma does have a higher valuation. So, this adds some risk. Overall, however, I think the long-term risk/reward proposition here is very attractive.  

Edward Sheldon owns shares in Gamma Communications

Roland Head: Synthomer

My pick for October is chemicals group Synthomer (LSE: SYNT). This FTSE 250 business produces a range of products, including medical latex gloves.

Demand has surged due to Covid-19 and Synthomer’s pre-tax profit rose by 40% to £160m last year. The company has reported further gains during the first half of 2021.

The risk is that when demand returns to normal, profits will collapse. But with the stock trading on just 10 times 2022 forward earnings, I think a cautious outlook is already priced in. I believe Synthomer could do well over the next few years.

Roland Head owns shares of Synthomer.

Zaven Boyrazian: Alpha FX

In today’s global economy, being able to manage foreign currency exchange risks has become paramount. That’s where Alpha FX (LSE:AFX) steps in.

The firm provides exchange risk-management services using a commission-based cost structure. This makes it far more accessible for smaller and medium-sized businesses compared to traditional corporate banking solutions. But beyond currencies, Alpha FX has launched a payment processing network for rapid international large-scale transactions.

In the last six months, revenue from its currency services grew by 48%. But its payments solution saw sales surge by 600%!

The company faces some fierce competition from corporate banks and rival financial service firms. However, Alpha FX continues to expand its market share nonetheless.

Zaven Boyrazian owns shares in Alpha FX.

Christopher Ruane:  Stagecoach

You wait ages for buses, then three come at once. Might this also describe bus company takeover bids?

News that rival National Express may bid for Stagecoach (LSE: SGC) could flush out other potential suitors for the Perth-based bus giant. Like we saw at Morrisons, it could be “all aboard” for a bidding war. In that case, I see short-term upside for Stagecoach shares – which is why I’ve made it my best stock to buy in October.

Even without a bid, I like Stagecoach for its large network, well-established brand and industry experience. One risk is takeover talks distracting management and slowing revenue recovery.

Christopher Ruane owns shares in Stagecoach.

Charles Archer: Centamin 

I think gold stocks like Centamin (LSE: CEY) are a good hedge against rising inflation. And while gold is down 13% over the past year, it’s still near record levels.  

The company is mining 400,000 ounces of gold in 2021. It has no debt, $312m in liquid assets, and pays a reliable 5% dividend. However, its share price is volatile. But at 92p today, analyst consensus is upbeat for the gold miner.  

There is a risk that the gold spot price will continue to fall. But I think Centamin is a safe long-term investment in this inflationary environment. 

Charles Archer does not own shares in Centamin.

Andy Ross: Vertu Motors 

Shares in car dealer Vertu Motors (LSE: VTU) have fallen from recent five year highs. This seems primarily due to the wider market weakening through much of September and potentially also some profit taking because the shares accelerated.   

The slight share price fall could be an opportunity though October and beyond. The shares are undoubtedly cheap on a P/E of six. That’s plus point number one.  

Number two is that car dealers are posting exceptional results at the moment across the board. This is due to the semiconductor shortage pushing up the prices of used cars. These conditions could well persist and boost Vertu’s profits.  

Andy Ross owns shares in Vertu Motors.  

Royston Wild: Prudential 

Okay, the Prudential (LSE: PRU) share price has bounced following the heavy falls it experienced towards the end of September. But the FTSE 100 stock still trades at a 7% discount to levels printed at the start of the month. This provides a chance for UK share investors to engage in some shrewd dip buying. 

Prudential’s share price slumped as fears over the Chinese economy blew up. The life insurance giant has famously made Asia the nucleus of its growth strategy. So naturally concerns over the region’s largest economy shook investor confidence in the company. 

As a long-term investor I wasn’t readying to sell my own Prudential holdings, however. I remain bullish over the FTSE 100 firm’s huge Asian bias, a plan that should allow it to exploit soaring wealth levels in those far-flung regions in the years ahead. I continue to think it’s one of the best stocks to own in October despite the threat posed by a Chinese slowdown in the more immediate future. 

Royston Wild owns shares in Prudential.

Paul Summers: Avon Protection

Supply chain issues, a tight labour market and product approval delays have collectively tanked the share price of respirator maker Avon Protection (LSE: AVON). While a full recovery will take time, I think the margin of safety is now sufficiently attractive for me to begin building a position.

With customers including the US Department of Defense, Avon is the global leader at what it does and, 2021 aside, has shown itself to be a quality business over the years. Given recent consolidation in the sector, I wouldn’t rule it out as a potential bid target. 

Paul Summers has no position in Avon Protection

Three companies stand out as having reported better-than-expected growth in recent months. So I’d buy all three stocks listed below for my portfolio today. 

UK shares to buy: tech champion 

The first company is one of the UK’s few tech champions. Trustpilot (LSE: TRST) manages the online review site of the same name.

In a world where scammers are increasingly active and trying to take advantage of consumers, a trusted, well-known review service like Trustpilot is becoming increasingly invaluable to provide consumers with unbiased advice. 

This demand is showing through in the company’s results. According to a recent trading update, Trustpilot expects to report total revenue of $62m for the first half of its 2021 financial year, representing growth of 31%. 

I think this growth is only likely to continue as the e-commerce market expands.

That said, the company’s growth isn’t guaranteed. It faces risks such as competition and trust. Fake reviews on the site could decimate its relationship with consumers. 

Despite these risks, I would buy the stock for my portfolio today. 

Construction growth

Another firm that sits on my list is construction retailer Wickes (LSE: WIX). According to this company’s latest trading update, total group sales in the 21 weeks to the 22 May jumped 45.7% year-on-year, and by 23.1% on a two-year basis against the equivalent pre-pandemic period in 2019. 

These numbers appear to show that the company’s registering solid growth and isn’t just experiencing a post-pandemic bounce. 

Still, the group could experience some headwinds as we advance if consumers move from spending money on home improvement products to splashing out on reopened experiences, such as restaurants. If the property market also suffers a slowdown, this could lead to a fall in demand for Wickes products. 

However, considering its position in the market and its recent growth, I’d buy the stock today. 

Turn around opportunity

As well as the companies outlined above, I think Reach (LSE: RCH) is also one of the best UK shares to buy now. I think the stock has turnaround potential. That’s why I’d buy it today.

But it might not be suitable for all investors. Indeed, the newspaper publisher faces some structural challenges, including the persistent decline in circulation. 

So far, management has been able to navigate the decline by moving operations online. For the four months to the 25 April, digital revenue grew 35%, with total print revenue down 10.4% and circulation down by 7.9%. Overall revenues declined just 3.1% as a result. 

While I’m well aware the company will continue to face challenges, I think its turnaround is bearing fruit. That’s why I’d buy the stock for my portfolio today, although I intend to keep a close eye on its progress.

If the turnaround starts to stutter, that could be a sign it’s time to sell.