Builders' merchant Travis Perkins PLC (LON:TPK) faces some short-term head winds, but longer term opportunities make it a 'buy' for Jefferies.
The broker has trimmed its target price from 1,690p to 1,670p, but with the shares tumbling from 1,565p to 1,469p yesterday after a disappointing trading update, that makes them a bargain.
“In our view Travis sits at something of a crossroads. Following two decades of acquisitive growth, the group is now investing to prepare the business for the next decade of organic growth,” Jefferies opines.
“While clearly more difficult in a slowing market, this strategy should lead to longer term out-performance. At c. 12x earnings the shares are inexpensive though we admit currently owning them depends somewhat on one’s capacity for some short term pain over potential longer term gains,” the broker admits.
On the plus side, some early macro indicators from the housing market have turned out better than the Jefferies building services team had expected.
Older, more affluent households tend to spend more on repair, maintenance and improvement (RMI), with Jefferies expecting these households to be the least affected by falling wages (in real times), which bodes well for Travis Perkins.
The oldies might also be dipping into their pension pots or withdrawing equity from their house, which could also boost the RMI market.
“Finally, the early signs indicate that the group has been successful in pushing through price increases in an effort to offset imported cost inflation, which should help to limit margin erosion,” Jefferies said.
As in other retail sectors, the internet and changing consumer habits are changing the builders' merchant business, meaning that operators must adapt of die.
The continued investment in the supply chain and enterprise resource planning should ensure that Travis Perkins is one of the winners in the sector over the long term, Jefferies argues.
Based on the brokers' estimates, the stock is trading on just nine times this year's projected earnings and 13 times next year's.
JP Morgan Cazenove, which recommends it clients be overweight in the stock, also sees reasons to be bullish rather than disappointed, following this week's trading statement.
The outlook statements from Travis Perkins (TP) are not gloomy enough to warrant a downgrade in the view of Caz.
“Overall the group is working on the assumption that housing transactions are down 8-10% in 2017. Traditionally, LFL [like-for-like] volumes trail transactions by 6-9 months and there’s a 1/3 relationship,” Cazenove notes.
“We already feel comfortable with this view given that 2017 estimate assumes volumes of -3% LFL. The latest mortgage approvals number for Jan was up 5% vs. the ‘16 average and transactions were +2% on the same seasonally-adjusted basis.
“Management commented in the presentation that current trading is robust,” Caz added.
The broker has a price target of 1,625p, and said its biggest concern in relation to that target was based on the prospect of margin erosion should TP fail to pass on the increased cost of raw materials.
Based on the performance in the second half of 2016, this concern has been laid to rest.
Finally, Deutsche Bank (DB) is also a buyer of the stock, with a target price of 1,640p.
The troubled plumbing and heating division remains in the doldrums, but DB believes the downgrade cycle could be nearing the end in 2017 with the divisional review on the way.
Despite all of this broker love, the shares were down 3.6% at 1,416p.