Looking ahead, further challenges may be on the horizon. However, could it now offer good value for money alongside another stock which is also experiencing a difficult period?

Uncertain outlook

Having reported a 25% fall in earnings in the 2017 financial year, 2018 does not appear to be improving for Safestyle. It continues to experience weak demand from consumers who have seen their disposable incomes fall in real terms in recent months. Alongside continued pressure from a new market entrant, this has meant that demand for its services has been below previous guidance.

Sensibly, the company is seeking to retain capital in case such conditions continue over a prolonged period. Therefore, it has cancelled the final dividend for 2017, while also undertaking a strategic review. Alongside this, it has appointed a new Chairman and will seek to refocus its efforts on becoming more efficient and delivering improved performance.

Clearly, Safestyle is now set to deliver a fall in earnings versus the previous year. However, it trades on a price-to-earnings (P/E) ratio of just 4 using last year’s earnings. As such, it appears to offer excellent value for money, although its difficult trading conditions could last for some time.

For investors who are generally upbeat about the UK economy, there could be a value opportunity on offer. Pressure on household incomes is falling due to lower inflation, and this may provide a boost for the company. But with its share price in freefall, Safestyle is likely to be of interest to only the least risk-averse of investors at the present time.

Turnaround potential

Also experiencing a difficult period is support services company Travis Perkins (LSE: TPK). The business has recorded two consecutive years of declining profitability, and is set to report further falls in its bottom line this year. Part of the reason for this is a general slowdown in demand across its key markets, with the UK economy’s growth rate having been downgraded since the EU referendum.

However, with Travis Perkins seeking to become more efficient, it is expected to return to positive growth in the current year. Certainly, growth of 5% may be relatively modest. But it would show that the business has underlying strength and is capable of performing well even in difficult market conditions.

Since the stock trades on a P/E ratio of around 13 and has a dividend yield of 3.7%, it appears to offer good value for money. With dividends being covered 2.3 times by profit, it could prove to be a strong income stock. Therefore, while potentially risky, now could be the right time to buy it.

The post Does the Safestyle share price’s 20% fall make the stock a bargain? appeared first on The Twelfth Magpie.

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Peter Stephens 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.

Here’s why I think the market has overreacted.

Profit warning

Granted, things could be better. While order intake has remained similar to that announced at its last trading update in May, the trend from week to week in Q2 has been “more volatile” than that experienced “for a long time“, according to the company.  

Following on from May’s AGM statement (which also prompted a fall in its share price), Safestyle now believes it will report “marginal revenue growth” and “reduced profits” for the first half of 2017. Sensing that consumer confidence will continue to weaken, the company also revised its full-year outlook by stating that profits were likely to be “broadly in line” with those achieved in 2016.

While today’s update is concerning, it’s not completely unexpected given the prevailing economic uncertainty. It’s also apparent that Safestyle continues to outperform its competitors based on recent statistics that point to a market decline of over 10% in terms of volume. Should the housing market suffer as economic pessimism grows, I believe Safestyle could be in a solid position as more homeowners consider making improvements to their existing properties rather than moving on.

In addition to the above, it appears to be the epitome of sound financial management. Cash flow remains strong and, despite considerable investment in new facilities, the company’s net cash position of almost £18m at the end of June should act as a decent buffer during tough times. Today’s announcement that management had already taken steps to reduce operating costs in H2 should also comfort those already invested. 

While the shares could certainly fall lower if sentiment worsens over the next few months, I think Safestyle warrants consideration once the dust has settled. Already trading at just 11 times earnings and offering (for now) a yield approaching 4.7%, I suspect this could be one knife worth catching.

A safer bet?

Of course, there are plenty of other options available to investors in the small-cap universe. Another reporting to the market this morning was email and marketing automation software provider dotDigital (LSE: DOTD).

In complete contrast to Safestyle, overall revenues at the Croydon-based company rose by 19% (to roughly £32m) over the year to the end of June. Revenue growth outside the UK was particularly strong (up 48%), with the Asia-Pacific market registering the strongest growth (up 156% to £700,000).  

With 81% of total group revenues now recurring and the average spend per client increasing by 24% to about £715m per month, I can’t see demand for the £210m cap’s services drying up anytime soon. Indeed, having completed his first full year as CEO, Milan Patel reflected that the “building blocks” were “now in place” for the company to perform strongly over the next year. 

Trading at 26 times forward earnings, shares in dotDigital look fully valued right now. Even so, I’m still attracted to the stock. Bear in mind that this company has shown a real ability to generate consistently high returns on the money it invests. At around 25%, operating margins are seriously good and dotDigital has the sort of free cashflow and balance sheet that would turn many companies green with envy.

The post Is Safestyle plc a falling knife to catch after dropping 10% today? appeared first on The Twelfth Magpie.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has recommended Safestyle UK. 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.

Counterintuitively, it can sometimes be safer for income investors to look lower down the market for their dividend fix. Thanks to their need to keep a closer watch on their balance sheets, smaller companies can often be more financially disciplined than their larger peers, thereby making their bi-annual payments more secure. 

With this in mind, let’s look at three companies that may currently be flying under the radars of many dividend hunters.

3 dividend demons

While shares in £220m cap windows and doors supplier, Safestyle (LSE: SFE) will always be linked to the somewhat unpredictable housing market, the company’s performance has been anything but erratic in recent times. Thanks to consistent annual increases in revenue and net profits, earnings per share for the current financial year are predicted to be triple what they were back in 2011. With stock trading on a price-to-earnings (P/E) ratio of just 12, stunning returns on capital, a debt-free balance sheet and — most importantly — a forecast yield of almost 4.7% for 2017, those looking for income may want to take a closer look at the Bradford-based business.

An alternative to Safestyle might be Headlam (LSE: HEAD). The £414m cap supplier of floor-covering products might not set pulses racing but — bar a slight wobble in 2013 — earnings have grown consistently over the last few years. While operating margins for this kind of business are understandably low, Headlam’s returns on capital are regularly in the mid-teens, underlining its status as a safe and steady performer. It has excellent levels of free cash flow and, with no net debt, possesses a sufficiently robust balance sheet. Trading on a very reasonable P/E of 13 for 2017, shares in Headlam come with a tempting forecast yield of 4.7%.  

Finally, there’s Hostelworld (LSE: HSW). When I last looked at this company back in August, shares were trading at 166p. Since then, they’ve jumped as high as 243p — not bad if you’re simply looking for a capital return. Those who invest for income may want to hold on or continue building a position, however. Based on estimates for 2017, shareholders in the Dublin-based hostel-focused booking platform will see a cracking yield of almost 5.5%. With a forecast P/E of 14, those considering this hugely cash-generative stock will also be getting access to these dividends at a decent price. 

Got it covered?

Finding companies offering decent dividends is just one half of the challenge facing income investors. After all, a chunky payout means nothing if it can’t be sustained (as many holders of FTSE 100 stocks have found out to their cost). This is why it’s vital to look at the level of dividend cover before clicking the ‘buy’ button.  

A company’s dividend cover is simply the ratio of its net income over the dividend paid. It’s calculated by dividing earnings per share by the dividend per share. For payouts to be safe, cover really needs to be as high as possible (and certainly more than 1). With cover at 1.74, 1.59 and 1.28 respectively, the dividends from Safestyle, Headlam and Hostelworld all look relatively safe for now.

One cautionary note. While small companies can be more nimble and financially disciplined than larger businesses, their size also means that they can come unstuck in economic crises. That’s why it’s vital to diversify your portfolio across a number of firms in different industries and markets.  

The post 3 small-cap dividend stocks for your shopping basket appeared first on The Twelfth Magpie.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

A key reason for this is Tesco’s strategy. It’s very simple but could prove to be very effective. That’s because it’s disposing of a number of non-core assets that have arguably made the retailer become bloated and inefficient over the years. Furthermore, it’s improving the efficiency of its supply chain, cutting costs and improving customer service. Together, these changes should result in a leaner, more profitable and better-performing Tesco.

With Tesco forecast to increase its bottom line by 146% in the current year and by a further 40% next year, there could be a step-change in investor sentiment over the coming years. And with it trading on a price-to-earnings-growth (PEG) ratio of only 0.4, Tesco seems to offer a wide margin of safety, which should mean that it easily beats the FTSE 100.

Two to watch and wait

While Tesco has beaten the FTSE 100 thus far in 2016, Topps Tiles (LSE: TPT) is down by 15%. That’s at least partly because of fears surrounding the outlook for the UK and global economies, with GDP figures being viewed as at risk of coming under pressure. As a relatively cyclical business, this could hurt Topps Tiles’ top and bottom line performance and cause its share price to continue to underperform the wider index.

With Topps Tiles forecast to increase its earnings by 6% this year and by a further 8% next year, it seems to be performing in line with the wider index. However, with the company having a PEG ratio of 1.8, its shares seem to offer little margin of safety. Therefore, its risk/reward ratio appears to be unfavourable and while in the long run Topps Tiles could perform well in a booming economy, for now it may be prudent to await a lower share price before piling-in.

Meanwhile, Safestyle UK (LSE: SFE) has outperformed the FTSE 100 by around 10% since the turn of the year. That’s despite it being arguably a more cyclical company than Topps Tiles and the fact that Safestyle is forecast to increase its bottom line by just 1% in the current year.

One reason for its outperformance of the wider index could be stronger growth next year, with Safestyle expected to deliver an 8% rise in earnings. Similarly, continued low interest rates and a booming UK property market could also be factors in its recent share price success. However, with Safestyle now trading on a PEG ratio of 1.6, its shares appear to be rather fully valued. As such, it may be worth waiting for an improved outlook or lower share price, since it remains a relatively cyclical business.

The post Will Tesco plc, Topps Tiles plc & Safestyle UK plc beat the FTSE 100 this year? appeared first on The Twelfth Magpie.

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Peter Stephens owns shares of Tesco. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Here I investigate if I should buy the shares of either company or whether ASOS (LSE: ASC) and Supergroup (LSE: SGP) offer better value. 

Opportunity at 28p?

French Connection is not a name that I find particularly attractive based on its track record and its prospects of growth. With a £27m market cap, the best outcome you can hope for is a takeover; its lowly valuation could attract buyers, in my view, but even then I would not expect a big equity premium. Its business is split between wholesale and retail, and I am concerned about the latter in particular. Its market value is down 53% this year, and while the bulls might argue that its valuation is cheap enough, I would consider its stock only after two quarters of solid trading updates. Meanwhile, I’d back the management of Safestyle. 

Safety at 248p

A manufacturer of uPVC windows and doors, Safestyle operates domestically in a buoyant market that is nicely growing and where it is gaining market share. Its half-year results showed that growth is not a problem, while its financials are rock solid. If anything, it would be nice to see a higher level of core profitability, but you’d be paying less than 14x 2015 earnings for its shares, and Safestyle could fare even better in the second half. If you had followed my advice in mid-July, you’d have picked up a defensive investment (+5%) that also offers a nice forward yield. If you are not interested in yield at all, and rich capital gains are all you can think of right now, then you should consider ASOS. 

Value at 2,558p

The market is not in love with ASOS, but as the online retailer recently pointed out it is on track to deliver a core operating margin of 4%, while its growth rate in the UK (about 40% of revenue) — as well as that in markets such as the US — presents the opportunity to buy a stock that currently trades 1,600p — almost 40% — below its 52-week high. That’s not to say that ASOS is a completely safe bet because you really have to take some risk to invest in it, but a fair value in the range of 3,200p and 3,500p is very possible if market volatility subsides — and if it doesn’t, there’s a chance that ASOS wouldn’t become much cheaper, based on fundamentals. Nick Robertson, its founder and previous chief executive, is no longer leading the business, but I think investors overreacted to the news in recent days.

Growth at 1,343p

Supergroup’s rally seems unstoppable, with its shares up 57% so far this year. Its full-year results, which were released in July, showed a strong growth rate for revenues, but even more noticeable was the the rise in its gross margin, up 120 basis points to 60.9% (2014: 59.7%). Pre-tax income rose only 2% to £63.2m (2014: £62m), while earnings per share of 59.1p were mildly better than one year earlier. Its net cash position has deteriorated, however. The market is willing to give credit to Supergroup — its shares are much cheaper than those of ASOS — but it must do more to convince me that it is a value play at around 1,300p a share. 

The post Should I Choose French Connection Group & Safestyle UK PLC Over ASOS plc & Supergroup PLC? appeared first on The Twelfth Magpie.

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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK owns and has recommended ASOS. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Safestyle: Cheap Enough

Safestyle is a UK-focused retailer and manufacturer of PVC windows and doors for the homeowner replacement market. It has a market cap of about £180m, which has risen by more than 3% today in the wake of an upbeat trading update for the six months ended 30 June 2015.

Its shares are up almost 40% this year, and currently trade at 235p — they hit a record high of 238.75p in early trade today. In spite of a rising valuation, its stock trades on lowly 13x, 12x and 11x net earnings multiples for 2015, 2016 and 2016, respectively.

Its balance sheet is solid, with a net cash position, and management has proved it can deliver growth and income from dividends, while maintaining financial discipline — all of which points to value. Finally, consider that its forward yield stands between 4.2% and 5%. 

Experian: Cautious Optimism

Its shares currently trade at 1,210p, having risen about 10% so far this year and 17% over the last 12 months.

I like Experian’s business model and I think this is an equity investment that should belong to a diversified portfolio, but its relative valuation — at 22x forward earnings — also suggests that taking a cautious approach could pay off if you are chasing value. 

Its growth forecasts are in line with expectations, although currency trends may be less supportive, its first-quarter results showed today. The group is likely to deliver rising earnings and dividends on the back of steady margins that will likely boost its rich free cash flow yield over time.

Net leverage, meanwhile, is around 2x and looks manageable. 

Its equity valuation is not far away from its record highs, and could receive a fillip if management decided to return cash to shareholders, which is a distinct possibility. 

Rio Tinto: One To Watch 

Rio released today its second-quarter production results, which essentially did not move the needle. 

Chief executive Sam Walsh said: “We have maintained our emphasis on efficiency and protecting returns.” I see little evidence of that but it appears clear that, at around 12x forward earnings, Rio Tinto is one name to keep on the radar. 

What also caught my attention today in the mining world was the announcement that Anglo American had decided to write down up to $4bn of assets, which is a good sign for Anglo, Rio and their competitors as miners have no choice but to clean up their balance sheets in this environment. 

Is that a case of short-term pain for long-term gains? 

Historically, hefty write-downs tend to signal the bottom for equity valuations in cyclical sectors; as far as Rio is concerned, we may not be there yet, although decent news for China’s GDP growth earlier this week were encouraging…

The post Do Safestyle UK PLC, Experian plc & Rio Tinto plc Trade In “Bargain Territory”? appeared first on The Twelfth Magpie.

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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.