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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 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.
The Citywire guide to investment trusts
In association with Aberdeen Asset Management
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