Halfords (LSE:HFD), best known for bicycle and car part sales, also has a very large service business (tyres, exhausts, batteries, MOTs, etc.). With its recent acquisition of National Tyres and Autocare managing 239 garages and Universal (20 sites) adding to its existing Autocentres, Halfords is now the largest or second largest along with KwikFit, both with slightly over 600 garages in UK and Ireland.
It’s shares have fallen from over £5 in 2016 to £1.70 (MCap = £1.70 x 218.9 shares = £372m) on fears of a major retail recession and because Halfords has not raised it’s EPS in ten years. The current year’s earnings are expected to be 26p, slightly less than in 2013.
The question is: even with an assumption of no growth in earnings in the future would I be happy to hold Halford’s shares through the next decade and more?
In other words, once the current recession has been withstood, is there assurity that Halfords will come through with earnings in future at least the same as its average for past years, i.e. 27.3p per share?
If so, that would put the shares on a PER of 170p/27.3p = 6.2. If there is no growth in revenue presumably these earnings will flow through to shareholders (there is no need for incremental capex and WC investment), giving a 16% yield on investment.
And then there is the possibility of earnings rising given the strategic strengths of the business, or merely because of inflation. In which case, the valuation estimate rises considerably.
Earnings and dividends.....
....A new team of directors took over in 2018. Since then there has been significant divergence between the statutory reported EPS and the one the directors prefer you to look at, the “underlying”. Guess which metric is used to trigger their bonuses.
I’ve looked at some of the costs they exclude to calculate “underlying” EPS – most do not seem exceptional to me. So we’ll ignore the directors’ measure.
With the average statutory EPS over ten years at 27.3p the cyclically adjusted price earnings ratio, CAPE, based on a ten year record is 170p/27.3p = 6.2, less than half that for UK shares generally.
Dividends paid are around half of what they used to be at 9p per share. Even at this reduced level the dividend yield is 9p/170p = 5.8%. If they were push dividends back to say 17p, yield rises to 10%.
Are they likely to maintain or increase the dividend?
This company carries no bank debt and had £46.1m in cash i.........
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