A ridiculously cheap FTSE 250 stock to buy right now?

Playful senior couple in aprons dancing and smiling while preparing healthy dinner at home

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FTSE 250 stock Howden Joinery Group (LSE:HWDN) is a kitchen specialist that continues to be at the top of my ‘buy’ list this month. Yet despite posting rock-solid results, many investors remain sceptical that this company can stay in front of the macroeconomic headwinds. At least, that’s the impression given by its cheap valuation.

However, looking at Howden’s track record, the firm has a habit of proving sceptics wrong. So let’s take a closer look at what could be a bargain buy today.

The kitchen gold rush

In 2020, with the government temporarily suspending stamp duty, the British housing market flourished. And this trend continued well into 2022 before growth in property valuations began to taper.

This momentum resulted in a 12-year high in UK home flipping. And with record levels of individuals refurbishing properties, Howden Joinery enjoyed some tremendous growth. In 2021, revenues surged by over 35%, with operating income more than doubling!

But in 2022, this growth slowed significantly, with the top line expanding by just 10% and profit coming in only 3.4% higher. With a lot of growth being pulled forward, paired with a general slowdown in the housing market, it’s clear that the kitchen gold rush is over. That’s a big risk for Howden.

But it doesn’t mean the long-term potential isn’t exciting. Delivering double-digit growth in the middle of a cost-of-living crisis is quite an achievement, especially after such a previously explosive year. Moreover, these short-term headwinds may turn into long-term tailwinds for this FTSE 250 stock.

With families staying put for longer, the desire for home renovation will likely creep back over the next couple of years. This could create yet another opportunity for management to send revenue and profits surging. And this time, the firm has even more depots in the UK and France to capitalise on the next round of momentum.

A record of success

With excess capital consistently being generated from operations, shareholders have been reaping the rewards of rising dividends as well as share buybacks.

In fact, the company has repurchased nearly 10% of its shares outstanding over the last five years. As such, management has had little trouble outperforming analyst expectations.
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2019

2020

2021

2022

Expected EPS

34.14p

24.75p

50p

55.35p

Reported EPS

34.8p

24.8p

53.01p

65.6p

However, just because the FTSE 250 stock has outpaced expectations in the past doesn’t guarantee this performance will continue in the future.

With interest rates back on the rise, the cyclicality of the housing sector may prove to be quite a tough challenge for the business to maintain growth, let alone expand it. And should earnings suffer, dividends along with share buybacks will likely follow suit. This uncertainty seems to be responsible for the group’s cheap-looking price-to-earnings ratio of only 10.2.

However, that’s far behind the industry average of around 15 times. Therefore, this risk factor may be already baked into the valuation. That’s why I’ve already added shares to my personal portfolio.

And with the demand for home renovation unlikely to disappear for decades to come, Howden Joinery looks like a lucrative opportunity for patient investors. The post A ridiculously cheap FTSE 250 stock to buy right now? appeared first on The Motley Fool UK. More reading

Zaven Boyrazian has positions in Howden Joinery Group Plc. The Motley Fool UK has recommended Howden Joinery Group Plc. 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.

Motley Fool UK 2023

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