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Smart Investor: how my Travis Perkins tip fared

On 13 July 2011 Smart Investor tipped Travis Perkins. How has the company performed since then, and is it still worthy of investment?

 
Smart Investor:  how my Travis Perkins tip fared

Smart Investor takes a look at one of his previous recommendations to see how it has performed since July of last year, and offers his verdict on whether it's still good value.

Did my tip work out?

On 13 July 2011 I wrote an article on FTSE 250-listed Travis Perkins (TPK.L) and recommended that it was 'a chance to buy a slice of a consistently profitable and financially viable firm at a reasonable price'.

At that time, the shares were trading at £9.64 and the FTSE 250 index was at 11,800. So, with the FTSE 250 today trading at 11,414, this article looks at what has happened to both the shares and the firm in the interim.

Shares in Travis Perkins are currently trading at £10.68, which gives a capital gain per share of 10.8%, during a time in which the FTSE 250 index has fallen by 3.3%. Additionally, dividends of 20p per share have been (or soon will be) paid, which gives a yield of 2% on the original recommended price. It should be noted the final dividend is not payable until May 2012.

A major 'wobble'

Of course, no share price chart is a smooth curve and, as we all know, prices are affected by both individual and general economic sentiment. The FTSE 250 had a major 'wobble' in August 2011 thanks to fears about the situation in the eurozone. The index fell very quickly to below 10,000 points and a significant amount of volatility continued until towards the end of 2011, when the curve started an upward trend which, a few hiccups aside, has continued until recently.

The company’s share price fell to as low as £7.15; a good buying opportunity for a fundamentally sound firm such as Travis Perkins.

A look at how the company itself has performed also reveals positive news. The 2011 results show that net profit has increased to £212 million from £141 million, giving a return on equity of 10% – an improvement but still not a hugely impressive figure. This is partly explained by the low levels of financial gearing, which have fallen from 43% to 31%.

In my previous article, I pointed out that the payout ratio of 22% was poor. With dividends for the full year confirmed at 20 pence per share, the ratio remains at 22%, which continues to be a disappointment. However, we can conclude that the 'consistently profitable and financially viable' part of the above quote still remains true.

Still good value?

Turning to value, the current price of £10.68 means that the price-to-book ratio is little changed since July of last year. The increased dividend means the yield is now around 1.9%, an improvement but still not impressive when compared with what can be obtained elsewhere. Meanwhile, the price-to-earnings ratio of 12.2 is also heading in the right direction.

So, should you sell, hold or buy? If you bought in July you are sitting on a tidy profit over the time period but, in my view, it depends on whether you want to 'dance in and dance out' or hold on. The company continues to make good progress: profits, dividends and financial gearing are all improving.

It has recently had good news in that the OFT has decided not to investigate its acquisition of ToolStation, so that potential drain on resources has also been removed.

My conclusion is that the recommendation in my original article holds true. Of course, the price may not be quite as attractive at current market levels as it was in July, but if you subscribe to a 'buy and hold' strategy then this is still one to seek out as a long-term investment.

3 comments so far. Why not have your say?

alan franklin

Apr 16, 2012 at 07:49

I am a customer of Travis and know the stores well. They cover large areas so rates bills must be high: all those bricks and wood take up a lot of space.

As someone who has also done a lot of sales and marketing I think they could use some of their space to sell higher value items - kitchens spring to mind - to the general public as well as builders.

They have kitchen showrooms in some of their stores, but not many and they are not advertised.

Their Wickes stores are not very competitive in range on offer and Travis itself often doesn't have what we want in stock. The prices are also often bettered by their competitors. They need a more straightforward discount system for their regular customers instead of you having to haggle over every item.

Travis staff are first class and know what they are selling. The stores are pretty good, but not as sharply managed as they could be. Their slogan on their trucks makes me laugh, something like "service at the cutting edge." The stuff they sell is more like the blunt edge- piles of building material! But their deliveries are good - far superior to B and Q, which is a joke.

ToolStation is a great store and offers competitive pricing- this will enhance the group as long as it doesn't get sucked into too much head office red tape. Wickes needs a big shake up and better range of goods.

I don't think Travis will ever do anything too silly but cannot see it becoming an exciting stock until top management becomes more imaginative and bolder.

That's my customer's eye view!

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Nimrod

Apr 16, 2012 at 09:35

TP is an expensive builders supplier. Wickes is becoming equally expensive as a result of joining the group. Independent suppliers tend to be much better value but are being slowly swallowed up or driven out of business by the expansion of TP, particularly in more rural areas, where the likes of Screwfix have so far shown no interest. Will the customer discover they are bad value as is/was Tesco?

In the short-term things look fairly encouraging for TP's profitability but beware the danger of over expansion, spiralling costs and deminishing returns!

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snoekie

Apr 16, 2012 at 15:39

I didn't have enough money to buy in in 2008, a decent holding, when they were around £6, with a previous high of near £16. Missed when they were @£1.71 at the back end of 08, then, like someone else posting on these boards, I had an itch about the money I had.

I opted instead for Morgan Sindall. Nice rise, but not as nice as Travis, but the return is somewhat better.

Nevertheless, Travis remains on my radar, and wish list, but at this price the return sucks.

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