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Should I buy Peloton stock?

Paul Summers — Sun, 29 Aug 2021 10:32:06 +0000

US-listed Peloton (NASDAQ:PTON) stock fell heavily last week. Is this a great opportunity for UK investors like me to buy a lockdown winner from across the pond? Here’s my take.

Why is Peloton stock falling?

One reason is a slowdown in revenue growth. As Covid-19 restrictions have lifted, Peloton has struggled to shift as many of its premium exercise bikes as it did in 2020. Accordingly, the firm now believes Q1 sales will come in at $800m. That’s a significant miss from the $1bn expected by analysts.

On top of this, the company has also had to deal with the fallout from the tragic death of a child who was pulled underneath one of its treadmills. In response, Peloton recalled its Tread and Tread+ products in the US. A similar recall happened in the UK after the running machines’ consoles developed a nasty habit of falling off. All this has added to company costs and potentially hurt its reputation. Investors are sweating.

Will this continue?

Lacking a crystal ball, no one knows what will happen. However, we do know Peloton intends to lower the cost of its once-highly-coveted bike for a second time by 20%.

While another reduction in price might attract those initially put off by the cost, it will also cause a near-term impact on earnings. That’s understandably frustrating for those already holding Peloton stock since the business only announced its first profitable quarter as a listed company in September last year.

Given the market’s obsession with what happens over the next few months rather than years, I suspect Peloton could be in for a rough ride for the rest of 2021. Bear in mind too that the S&P 500 could conceivably let off steam soon.

No matter. There are a number of other ways I can tap into the keep fit/wellness industry without buying Peloton stock.

Better buys?

I’d be more tempted to buy shares in Gym Group. Back in May, it announced that trading since being allowed to reopen was outperforming its own expectations. Membership numbers have bounced back, suggesting that the social aspect of exercise is still important to fitness fanatics.

Another alternative would be retailer Halfords. Like Peloton, the UK company was a huge beneficiary of multiple UK lockdowns as people sought to stay fit (and sane) by getting outside on their bikes. Despite rising 122% in value over the last year, the shares still change hands for just 12 times earnings. Then again, one drawback is that riders tend not to replace their durable companions every few months.

A third option is nutrition firm Science in Sport. Its share price has climbed almost 150% since last August. However, its small-cap status makes the stock potentially very volatile. Competition is also fierce. I think this is arguably the riskiest option of the three.

Hard pass

The fall in Peloton stock isn’t a complete surprise. We’ve seen a few UK lockdown winners drop in value as investors have piled back into battered value plays.

The lack of consistent profits, however, is more worrying for me. Aside from aesthetics and tech, I’m still struggling to justify buying one of its machines when cheaper options still do the job. If I wouldn’t buy as a consumer, why would I buy as an investor?

For now, Peloton stock is a hard pass for me.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Peloton Interactive. The Motley Fool UK has recommended The Gym Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Would I buy or sell these top-performing UK shares?

Paul Summers — Wed, 26 May 2021 06:58:40 +0000

Tragic though the global pandemic is, it’s also been a boon to many companies. The question their shareholders now face is whether to continue buying, retain what they have or start selling. I’m a long-term investor and don’t sell often. So what would I do with three UK shares that thrived in 2020? For a start, I’d only buy one!

Halfords

Bike and car parts retailer Halfords (LSE: HFD) was a huge beneficiary of the push to exercise during lockdowns. With movement restricted and most shops and all leisure facilities closed, what could be better than peddling the misery away? Sales duly rocketed, followed by its share price.

The company, which also operates auto repair centres, releases its latest set of full-year numbers next month. While the inevitably good numbers should push the shares higher, a cautious outlook could do the opposite. After all, trading may be about to get tougher as the UK prepares to fully unlock.

Halfords faces two problems: those with bikes won’t be in a hurry to replace them and people now want to spend their money on things they’ve been itching to do. On top of this, it still presents as a pretty unexceptional company without last year’s unexpected tailwind. Margins are low. Returns on capital — what it makes on the money it invests in itself — are also very average.

I wouldn’t buy and might even sell some if I needed cash to invest in what I see as a better growth pick.

AO World

Another company that’s done well out of the pandemic has been online domestic appliance seller AO World (LSE: AO). In fact, it was one of the best-performing UK shares last year. The share price rocketed from 57p a pop in April 2020 to 411p a share by 31 December.

Since then, however, we’ve seen sentiment turn. I don’t think this is surprising. CEO John Roberts is confident that AO will “continue to be a double-digit growth business in the year ahead,” but the market seems to think otherwise. On 29 times earnings, the stock also looks pretty expensive for a company with no discernible moat or market-leading position. Will customers remain loyal? I’m sceptical.

Prior to Covid-19, AO was a loss-making, ‘jam tomorrow’ stock. Without evidence that it can continue to thrive in normal market conditions, I’d be taking some profit here if I hadn’t already started doing so.

Gear4music

Multiple UK lockdowns have also been kind to online musical instrument seller Gear4music (LSE: G4M). Over the last year, the share price has leapt 225%! The question now is whether this momentum can be sustained after the company reports to the market on 22 June.

Like Halfords, Gear4music faces some tough comparisons going forward. While playing music can be a lifelong pursuit, one has to wonder whether people have all the guitars, drums and trumpets they need for now. G4M’s small-cap status also means it’s more susceptible to big share price moves compared to the average FTSE 100 juggernaut. If investors get nervous, the party could be (temporarily) over.

But the long-term growth prospects are surely excellent thanks to the gradual reduction of independent musical instrument retailers on the high street. For this reason, I’d be happy to hold this UK share. If the shares fall back next month, I’d back up the truck and buy too.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Have £3,000? Here are 3 stocks I’d buy for my ISA as lockdown lifts

Paul Summers — Sun, 31 May 2020 08:36:14 +0000

The market has unsurprisingly welcomed the news that lockdown restrictions are to be slowly lifted over the next few weeks. Arguably the most important detail, as far as the economy is concerned, is the re-opening of all non-essential shops by 15 June. With this in mind, here are three potentially great ISA buys that might do better than most in the new retail environment.

Cheap ISA buy?

The fact that shops are being allowed to reopen does not mean that consumers will be in the mood to spend like there’s no tomorrow, of course. They may, however, feel the need to replace some of their more comfortable ‘lockdown clothing’.

For me, this could be good news for Primark-owner Associated British Foods (LSE: ABF). Say what you like about the wares sold by this company — the fact that you can fill a wardrobe on the cheap could mean it does better than most during a recession.

Another attraction to ABF is that it isn’t solely dependent on the success of its stores — it has its fingers in the grocery, agriculture, sugar, and ingredients markets. This makes it a good ISA option for defensive-minded investors, in my opinion.

True, the shares haven’t done particularly well over the last few years, but consumers’ desire to find value for money in tough times could mark a change in direction.

If we assume that analyst predictions on earnings in FY21 are still roughly correct, the stock also changes hands at a really-rather-decent valuation of 14 times earnings.

Quality operator

My second pick of retailers would be FTSE 100 sports and casualwear firm JD Sports (LSE: JD).

Boasting excellent free cash flow and experienced management, this business looks set to go from strength to strength. Having established itself as a go-to destination for trainer lovers in the UK, it’s now targeting large overseas markets such as the US.

Is a lot of this already priced-in to the shares? Quite probably. Like many stocks, the optimum time to buy was a couple of months ago. From mid-February to mid-March, JD lost two-thirds of its value. The share price has more than doubled since.

Hindsight is a wonderful thing, of course. Nevertheless, JD is one of only a handful of FTSE 100 stocks I’d feel comfortable holding within an ISA for the very long term. And companies like this rarely stay cheap for long.

Riding high

My third and final selection is something of a wildcard: bicycle-seller and auto parts retailer Halfords (LSE: HFD).

I’ve actually been very bearish on this company in the past, partly due to its lack of an economic moat. But the coronavirus pandemic has altered my stance somewhat. In case you haven’t noticed, cycling has been hugely popular over recent months as long-distance travel has been prohibited.

To be clear, I don’t think Halfords is a ‘buy-and-forget’ stock. There’s no guarantee that those who say they now plan to ride to work rather than catch public transport will actually do so. There’s also quite a bit of debt on the balance sheet.

Even so, the next set of numbers released by the company is likely to be very good indeed. Those buying a small amount now for their tax-efficient ISA could still do well.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Associated British Foods. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

A dividend cut isn’t the only reason I’d steer clear of this small-cap stock

Paul Summers — Thu, 07 Nov 2019 11:01:24 +0000

It’s not easy being a retailer of, well, anything these days. Just ask bike and car accessories seller Halfords (LSE: HFD).

Despite decent numbers from its car services division, a 3.8% reduction in sales at its retail arm (blamed on a difficult backdrop and poor weather compared to last year) meant overall revenue dropped 2.9% to £582.7m over the six months to 27 September. While “in line with expectations,” pre-tax profit also declined 2.5% to £27.5m.

Given the above, you might be asking why Halfords shares were up earlier this morning. The fact the company chose not to alter its guidance on profit for the full year (£50m-£55m) is likely to have helped. However, I believe a chunk of today’s early gains can probably be attributed to plans to focus even more on its Autocentre business through investment in more garages and mobile vans. This, management believes, will ultimately lead to “higher and more sustainable financial returns.”

Considering that people must keep their cars in good working order whatever the weather, this strategy makes sense (although I remain sceptical on how inclined drivers will be to switch mechanics). Nevertheless, becoming a market leader will require sacrifices.

As I speculated in September, the company announced today its final dividend this year would be reduced to 8p. The total dividend will then be lowered to 12p per share from FY21 onwards. While unsurprising, this development will clearly disappoint those invested for income.

Of course, you might argue that, at just 7 times forecast earnings, Halfords is simply too cheap to pass up. There might be something in this. However, with no certainty its strategy will work and sales of big-ticket discretionary products likely to remain under the cosh for a while thanks to Brexit, I think there are less risky options elsewhere.

One example would be vehicle marketplace Auto Trader (LSE: AUTO). As luck would have it, the FTSE 100 member also released half-year numbers this morning. And what great numbers they are.

Motoring ahead

Revenue accelerated 6% to £186.7m in the six months to the end of September, along with a 12% increase in pre-tax profit to £127.7m. A quick glance at the stats helps explain why.

Cross-platform visits per month, at 51.2m, were 4% higher compared to over the same period in the previous financial year. The average revenue generated per retailer climbed 7% to £1,951 and the amount of physical stock jumped 10% to 481,000.

Although the vast majority of the latter was made up of used vehicles, CEO Trevor Mather pointed out that the site now lists “over 30,000 brand new cars” which were “viewed by 1.6m people in September alone.” To be clear, Auto Trader remains the clear market leader at what it does.

Looking ahead, the £5bn-cap said it was likely to meet growth targets for the full financial year, “despite ongoing market uncertainty.” As a sign of confidence — and in contrast to Halfords — it also raised its interim dividend by a little over 14%.

The only downside to all this is that tapping into Auto Trader’s success comes at a hefty price (almost 25 times earnings before markets opened). Considering the company’s dominance, seriously high returns on capital employed, and improving finances, I’d be far more likely to buy a slice of this quality stock than the aforementioned market minnow.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Auto Trader. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

This stock’s dividend yield is scarily high. Is a big cut on the way?

Paul Summers — Mon, 23 Sep 2019 09:27:48 +0000

Many investors look for income from their portfolios, whether it’s to reinvest back into the market — which we at the Fool UK would heartily recommend if you’ve still got many years before retirement ahead of you — or used to supplement the rather meagre State Pension. But this strategy is clearly not worth the effort (or cost) if the stocks selected don’t have the capacity to pay out cash to their loyal shareholders.

How do you spot such companies? Two indicators are a simply too-good-to-be-true dividend yield, and dwindling dividend cover (the extent to which profits cover the total payout, where twice is ideal).

With this in mind, here’s one firm I think faces the real possibility of being forced to substantially cut its dividends.

Punctured profits

Halfords (LSE: HFD) is a household name. Then again, the same thing can be said about Thomas Cook. Familiarity is nothing without decent profits to back it up. And having now issued a number of warnings, it’s clear the bike retailer and auto repair operator is now struggling to pull in as much cash from consumers as it used to.

In this month’s trading update for the 20-weeks to 16 August, the company said strong sales growth online and B2B had been “more than offset by the impact of the challenging retail backdrop and tough weather comparators year-on-year.” In other words, fewer people were buying bikes and motoring accessories due to things like Brexit and the fact that last year’s sweltering summer motivated more of us to get outside. All told, like-for-like revenue was down 3.2%.

To make things worse, Halfords’ management was rather downbeat on trading going forward.“The impact of the uncertain economic environment remains an ongoing risk to big-ticket discretionary purchases in the second half,” it said. Underlying pre-tax profit is expected to come in somewhere between £50m and £55m.

Cheap… for a reason

Investors have been bearish on Halfords for some time now. From hitting a peak of 388p a pop back in May 2018, the shares have tumbled 56% to just 171p. The company now has a valuation of just £340m, leaving it firmly in small-cap territory.

Of course, some might argue its lack of popularity among investors now makes this retailer a great contrarian bet, in the same way Pets At Home once was. Based purely on a forecast price-to-earnings (P/E) ratio of just 8, Halfords presents as a bargain. At 9.5%, the dividend yield looks mighty tempting too.

But the latter is a red flag, in my opinion. With profits only likely to cover the payout around 1.3 times, the 16.3p per share cash return forecast by analysts will surely be questioned if the business fails to stabilise earnings. And while we might only be talking about a cut here, this doesn’t actually solve Halfords’ biggest issue. Its lack of an economic moat.

What’s to stop someone testing a bike in store and then going home to order online from a (cheaper) competitor? What makes Halfords’ mechanics better than rivals? Management’s talk of offering a “differentiated, super-specialist shopping experience” isn’t sufficient, as far as I’m concerned. And the fact the company is still to launch an integrated website — combining both its retail and autocentre operations — speaks volumes. The winding road ahead looks long and tough.

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Are the ITV share price and 7% yield too good to be true?

Roland Head — Tue, 21 May 2019 12:10:49 +0000

The ITV (LSE: ITV) share price took a battering earlier this month after the firm’s first-quarter update showed a 4% drop in revenue.

As a shareholder, I didn’t think the figures were too bad. Indeed, some of the numbers in the update gave me confidence ITV is still making good progress and remains attractive.

Online revenue should rise

One element of the firm’s turnaround strategy is to gain share in online viewing and generate more revenue from digital streaming.

On this score, I think ITV logged a pretty solid performance during the quarter. Although total viewing (broadcast and online) fell by 3% to 4.4bn hours, ITV’s share of UK television viewing rose from 23% to 24%.

Viewers watched 96.8m hours of online television, a 16% increase on the same period last year. Meanwhile, the number of users registered on the ITV Hub service rose by 29% to 28.4m. To put this into context, government statistics show there are 27.2m households in the UK. So on average, there’s at least one ITV Hub account for every household in the UK.

This suggests ITV has increasingly detailed information about individual user’s viewing habits. This should be useful as the firm rolls out its new advertising platform, which will provide the kind of tailored advertising we’re used to seeing in our social media accounts. I expect online revenue to rise over the next couple of years.

Production profits

The second element of ITV’s strategy is to focus on content production. Revenue growth of just 1% from ITV Studios was a little disappointing, but this is expected to improve as the year progresses.

For now, I think shareholders should be patient. ITV remains highly profitable and in good financial health. The shares trade on less than nine times 2019 forecast earnings and offer a 7% yield. In my view, that’s too cheap. I remain a buyer.

Should I buy this unloved retailer?

Shares in motoring/cycle goods and services retailer Halfords Group (LSE: HFD) dipped slightly today after the firm said pre-tax profit fell by 24% to £51m last year.

The figures were in line with broker forecasts but highlight the challenges facing the firm. Halfords says profits last year were hit by factors including the mild winter and weaker consumer confidence in the run-up to Christmas.

However, I think the problem facing the firm is that it’s struggling to stay relevant and develop a loyal customer base.

Here’s the plan

The company is aiming to develop a wider range of in-store cycle and car maintenance services while improving its retail offering.

Management was planning to spend £40m-£60m on this transformation in 2019/20, but has now scaled this back to £35m. Apparently, this is being done to reflect current market conditions. I’m not sure I understand this.

What I do understand is that Halfords’ profit margins have been falling steadily since at least 2013, when the company reported an operating profit margin of 8.8%. Today, that figure is 4.8%.

Halfords shares are worth less today than when the company floated on the stock market in 2004. The shares look cheap, on 10 times forecast earnings and with a 7.6% yield. But I’m concerned by the slow pace of change. This retailer is staying on my watch list for now.

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Roland Head owns shares of ITV. The Motley Fool UK has recommended ITV. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Got £2k for a Stocks and Shares ISA? Two 7%-yielders I’d buy today

Roland Head — Wed, 03 Apr 2019 10:20:27 +0000

This year’s ISA deadline is in just two days. I wouldn’t rush to make any last minute investment decisions, but if you are still looking for stock ideas, then I want to look at two 7% dividend stocks I think could be a profitable buy at current levels.

A turning point

Shares in online financial trading firm CMC Markets (LSE: CMCX) have fallen by more than 50% over the last year. The firm has been hit by the impact of new regulations limiting the amount of ‘leverage’ — or credit — it can offer to its retail customers. But something happened this morning which makes me think the worst is now over.

CMC issued a trading update warning that revenue for the year ended 31 March would be lower than expected due to the impact of the rule changes. The group’s revenue is expected to fall by 37% to £131m this year, well below City consensus forecasts of £148m.

However, management said that there are signs the situation is stabilising. Importantly, chief executive and founder Peter Cruddas remains confident in forecasts for 2019/20. City analysts expect the firm’s profit and revenue to bounce back in the 2019/20 financial year. Revenue is expected to climb to £167.5m and earnings are expected to rise to 8.9p per share. Crucially, the dividend is expected to return to growth, with a forecast payout of 5.9p per share.

These forecasts price CMC shares at just 9 times 2020 earnings, with a dividend yield of 7.1%. If Cruddas can deliver on these expectations, I believe the shares look very good value at current levels. With overseas diversification continuing, I’d buy.

A good business going cheap?

Cycle and car parts retailer Halfords Group (LSE: HFD) shocked the market in January with a profit warning. I wasn’t completely surprised. Conditions are tough in retail and the company had indicated previously that trading was likely to be more subdued than the previous year.

The firm’s latest guidance is for a reduction in profits for the year ended 30 March, followed by a flat performance in 2019/20. How realistic is this? We can’t be sure, but in my view this business has certain advantages that leave it in a stronger position than some high street rivals.

Key among these are that Halfords has low levels of debt and enjoys strong cash generation. This business is also more profitable than some other big retailers, such as supermarkets. These advantages should help to protect the dividend and provide the cash needed to return the business to growth.

Chief executive Graham Stapleton hopes to turn the business around by focusing more on offering services for motorists and on improving the group’s credentials as a specialist cycling retailer.

Stapleton also hopes that the group’s Autocentres car maintenance business will continue to help attract new customers, broadening Halfords customer base.

This strategy isn’t without risk — Halfords could face a slow decline. But the firm’s financial performance and solid track record suggest to me that this could be an opportunity for contrarian investors.

With the shares trading on 10 times 2019 forecast earnings and offering a covered dividend yield of 7.5%, I think Halfords could be worth a closer look.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Why I think it’s time to be greedy with the SSE share price

Roland Head — Thu, 10 Jan 2019 14:23:36 +0000

Investment analysts often use a technique known as mosaic theory to predict how a company’s performance might change in the future. By combining many small pieces of information, they form a view on what might happen next.

How’s this relevant to us? Well, big utility stocks have been seriously out of favour over the last few years. The SSE (LSE: SSE) share price has fallen by 27% over the last two years ,and the group has been forced to schedule a dividend cut for 2019/20 — something it’s never done before.

Bearish investors have put forward a whole list of reasons why things may continue to get worse. I’m not so sure. Mosaic theory suggests to me that the outlook may soon start to improve.

The market is changing

Customer numbers fell by 6% at SSE last year, as many opted for cheaper fixed-rate deals from smaller energy suppliers. Unfortunately, some of these cheap deals are turning out to be unsustainable.

Eight small energy suppliers went bust last year. On Wednesday, a ninth, Economy Energy, failed, leaving a further 235,000 customers in need of a new energy supplier.

Although the government’s new price cap is expected to have a moderate impact on big suppliers like SSE, it’s also said to be hurting small suppliers, who lack the financial muscle of the big players.

Overall, it’s starting to look like many cheap deals from small suppliers were too good to last. I think larger firms will enjoy a more level playing field over the next few years.

The bad news is in the price

Billionaire investor Warren Buffett has often noted that investors should be greedy when others are fearful. I think this could be one of those times. SSE has had a lot of bad press over the last year, but this information is already known and reflected in the share price.

Looking ahead, I think there’s a good chance the group’s performance will gradually recover. As the UK’s largest renewable supplier, SSE could be well positioned for the future.

With the group’s shares trading on 11 times 2019/20 earnings, and offering a dividend yield of 7.3% (after the dividend cut), I think SSE looks like a good buy for a long-term income.

This could be one to avoid

One the other hand, problems at cycle and motoring retailer Halfords Group (LSE: HFD) still seem to be getting worse.

The Halfords share price was down by 20% at the time of writing on Thursday, after the company issued a profit warning. Underlying pre-tax profit is now expected to fall by about 15%, to between £58m and £62m. Previous guidance was for this figure to be unchanged from last year, at about £72m.

The company blames November’s warm weather for a fall in sales of weather-related motoring products. But sales of more expensive adult cycles also fell slightly over the Christmas period. You can’t blame mild weather for that.

My verdict

Halfords isn’t without attractions. Debt is low and the firm’s cash generation has historically been very good. The shares yield 8% after today’s fall, and management made a fresh commitment to maintain the dividend in September. A cut seems unlikely, unless things get much worse.

However, today’s news is a disappointment. I’d be tempted to wait until the picture improves before considering whether to invest.

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How UK shares could build a £339,849 ISA

Forget the cash ISA! I think this FTSE 250 dividend stock could provide a reliable 5.8% income

Roland Head — Thu, 08 Nov 2018 15:25:32 +0000

Cash ISAs offer a tempting combination of tax-free safety and interest income. But the reality is that the interest rate on most ISAs is still below 1.5%. That means the value of your cash won’t even keep pace with inflation.

To be honest, this doesn’t seem like much of a reward for your hard work.

Although I’d always aim to keep some cash available for rainy days, I prefer to put most of my savings to work by investing in dividend stocks. This tends to provide a higher level of income, and the potential for long-term capital gains.

Today I want to look at two FTSE 250 dividend stocks from my watch list.

Signs of improvement

Cycling and car accessory retailer Halfords Group (LSE: HFD) needs no introduction. But the firm’s after-tax profits have fallen in each of the last four years, as rising costs and a changing mix of products have put pressure on margins.

Thursday’s half-year results from the company suggest more of the same. Although like-for-like sales rose by 2.5% and group revenue was 1.9% higher at £599.9m, underlying pre-tax profit fell by 17.1% to £30.5m.

The company said that strong sales of electric bikes, tools, dash cams and cleaning products helped to offset a slow start to the year. Sales of car repair and maintenance services through the Autocentres business also improved, rising by 3.3% on a like-for-like basis.

Buy, sell or hold?

Halfords’ underlying operating margin was 5.3% during the first half of the year, down from 6.5% during the same period last year. That’s a disappointing result in my view, although today’s figures do appear to be broadly in line with broker forecasts.

One highlight was free cash flow of £34m, up from £30m for the same period last year. Cash generation has always been a strength of this business, and it’s good to see this continue despite lower profit margins.

The shares are priced for a low-growth future, trading on just 10.5 times 2019 forecast earnings. This year’s forecast dividend of 18.1p per share looks affordable to me and would give a yield of 5.8% at the current share price.

In my view this out-of-favour retailer could be worth considering as an income buy.

Better than expected

Sales of new cars in the UK have fallen by 7.2% so far this year, according to industry figures. A slump in diesel sales is mainly to blame, but so too are supply bottlenecks caused by the new WLTP emissions testing regime.

Despite these headwinds, dealership group Lookers (LSE: LOOK) expects to deliver results in line with previous expectations this year. Indeed, the firm said that a shortage of supply in September enabled it to increase profit margins on new cars sold last month.

Although overall gross profit from new car sales fell by 5% during the nine months to 30 September, gross profit from used cars rose by 10% and after-sales profits were 6% higher.

In a statement to investors, management pointed out that new car sales are still at historically high levels, despite this year’s fall.

In my view, this suggests further falls in new car sales are possible. But if you have a more optimistic outlook, then Looker shares could be worth a look. Trading on 7.3 times forecast earnings with a 4% yield, they don’t look expensive to me at the moment.

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Are you tempted by the 20% fall in the Lloyds share price? Here’s what you need to know

Peter Stephens — Tue, 04 Sep 2018 10:10:33 +0000

In the last five years, the Lloyds (LSE: LLOY) share price has fallen by around 20%. Clearly, that’s a disappointing performance, and suggests that the company has experienced a difficult period.

While that may be true in one sense, with the prospects for the UK economy being uncertain, the bank has been able to deliver improved financial and operational performance. And with its shares now trading on a relatively low valuation, it could be worth buying alongside another cheap stock that released upbeat results on Tuesday.

Improving outlook

The company in question is retail stock Halfords (LSE: HFD). It released a 20-week trading update which showed a solid performance despite a tough operating environment. Its like-for-like (LFL) sales increased by 2.8%, with its motoring sales rising by 3.8%. They were driven by growth in fitting services, car cleaning products and staycation-related products. Cycling sales moved 0.8% higher, with poor weather hurting their performance.

The company’s Autocentres recorded 4% sales growth, with operational improvements continuing to boost the division’s outlook. Due to this, the overall prospects for the company are relatively upbeat, with it being on track to meet guidance for the full year.

With Halfords due to record a rise in earnings of 8% in the next financial year, its performance looks set to improve. Despite this, the company trades on a price-to-earnings growth (PEG) ratio of just 1.4. This suggests that after a share price fall of around a third in the last three years, the stock could offer good value for money. Over the long run, it could prove to be a sound turnaround opportunity.

Recovery potential

The prospects for the Lloyds share price may also be relatively impressive. As mentioned, the company has been able to deliver improving operational performance, with reduced costs and higher levels of profitability being recorded in recent years. And while the UK economy is forecast to experience further difficulties in the near term, the bank is expected to deliver further profit growth in the next two financial years.

Having fallen heavily in the last five years, the bank now has a price-to-earnings (P/E) ratio of around 9. Although this could potentially move lower if investors become increasingly nervous about the Brexit process, it could represent a value-investing opportunity for the long term. At the present time, the stock is perhaps one of the most unloved shares in the FTSE 100. This could therefore make it the right time to buy for investors who are able to cope with volatility in the short run.

With Lloyds set to yield over 5% this year, it could offer stronger total returns in the next couple of years than investors are currently anticipating. While it may not be the most exciting stock in the FTSE 100 in terms of its forecast growth rate and business model, its risk/reward ratio appears to be compelling.

The post Are you tempted by the 20% fall in the Lloyds share price? Here’s what you need to know appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.