General / Howden Joinery (HWDN)

I’ve given the blog a bit of a refresh after a friend accused it of being a bit ‘stodgy’. It should also look a bit better on mobiles and tablets now – which apparently make up 25% of my readers! Direction-wise, I will hopefully be back on the small-cap equity bandwagon soon enough – pending some final job-related stuff. The markets are looking decidedly wobbly at the moment, but there’s always value to be found if you overturn enough stones.

I continue my love affair with Howdens, for instance, which is more or less flat year-to-date even after continuing and relentless improvement in their figures. I sold out far too soon, and am now left with the slightly more difficult decision as to whether to buy back in. I think the group will make £140m in net profit this year, which puts them at not-cheap P/E of nearly 16. Countervailing that, you’re buying a quality business with great returns on capital. The real lever you have to pull to shift Howdens from being a decent investment to a great one is how much of that (effective) capital – they lease their stores, so outlay is fairly minimal, and they have basically no traditional debt obligations – is actually able to be deployed. One of the things that caught me out was management’s growing confidence that they’re able to open more and more stores in the UK without cannibalising existing sales. They seem pretty bullish on this trend continuing, hence my optimism for the group generally, but I would like to hear management’s plans on France. They have a small depot toehold over there that they’re clung on to, but things are beginning to move:

In France, we have seen an improvement in the financial performance of the depots, after amending the pricing strategy. This has given us the confidence to extend the trial in two directions. First, we plan to open two depots in Belgium that will be the same format as our existing French depots and will allow us to learn about a slightly different market. Second, we plan to open an outlet with a new format and name further south in France. This will be larger than existing depots, and will be open to both trade and retail customers.

The last bit worries me a touch – it always struck me as core to their strategy to have the relationships with joiners that they do, as it’s effectively like having a free sales force. If you serve them as well as Howdens seem to, they’ll keep coming back.  It probably shouldn’t worry me, though. Management have done a fantastic job here, and I note their slow and steady rollout. If they need to change their format to succeed, that’s fine by me.

A lesson on why not to sell quality shares when they hit some pre-determined P/E target; that sort of analysis is too ham-fisted to capture the real underlying economics of machines which have an effective way of compounding your capital.


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