Yahoo Finance Questor: two businesses able to withstand inflation whose shares are incredibly cheap
An inflation rate that stands at its highest level since 1992 does not bode well for the housing market. Rises in the cost of living have already prompted the Bank of England to raise interest rates at each of the past three meetings of its Monetary Policy Committee. Higher interest rates make houses less affordable and this can lead to harder times for housebuilders such as our previous recommendation Redrow.
Its shares have fallen by 24pc this year and by 22pc since our original tip a year ago as investors have priced in weaker demand for new homes. In tandem, the cost-of-living crisis, also prompted by higher inflation, weakens housing affordability further.
Meanwhile, a one-off cost for the company to remedy its relatively limited historical cladding issues is expected to amount to £200m following recent government intervention.
Despite these challenges, Questor retains its upbeat long-term view of Redrow, for several reasons. The company’s financial position remains very sound; its net cash of £242m suggests it has the means to overcome a weaker operating environment. It also trades on an extremely low valuation that adequately takes into account potential industry challenges. Its price-to-earnings ratio is 7, while its price-to-book ratio is less than 1.
In addition, there is no certainty that demand for new homes will materially decline. Rising interest rates are by no means inevitable – despite that 30-year high for inflation – because of the Bank of England’s continued concern about economic growth. Even if interest rates continue to rise, would-be home buyers may decide to go ahead with their purchase to lock in a lower rate of interest via a fixed-rate mortgage.
Over the long run, there remains a fundamental imbalance between housing demand and supply that, thanks to a combination of population growth and limited new development, is not expected to narrow. While government support will inevitably evolve, it seems unlikely there will be no further help for first-time buyers once the mortgage guarantee and Help to Buy schemes come to an end over the next year.
Therefore, while Redrow faces a period of continued uncertainty, its solid financial position, low valuation and long-term growth opportunities make it an attractive bet. Keep buying.
Questor says: buy
Ticker: RDW
Share price at close: 531p
Update: Halfords
Rampant inflation has also hit retailers’ prospects in recent months. Consumer confidence is now at its weakest level since 2008 and could deteriorate further as the cost-of-living crisis gathers pace.
As a result, Halfords’ shares have fallen by 35pc so far this year and by 28pc since our original tip in March last year. However, we maintain our optimistic outlook for the company. Its net‑debt‑to‑equity ratio (including lease liabilities) of 50pc and interest cover of 12 in the first half of the current year suggest it has the financial means to withstand what could prove to be a very weak operating environment in the short run.
Moreover, it has continued to shift its revenue sources to the less discretionary, more resilient motoring services segment through organic growth and acquisition. Its Autocentres generated like-for-like sales growth of 10.7pc in the most recent quarter and offer significant long-term growth potential as electric vehicles become more popular.
Sales of EVs in the first quarter of the year doubled relative to the same period the previous year. According to the Institute of the Motor Industry, there could be a shortfall of about 35,000 EV technicians by 2030. Since Halfords is investing heavily in its EV servicing offer, in terms of training and equipment, it could be in a far stronger position than its rivals to service rapidly growing demand. In particular, smaller, independent garages may struggle to bear the cost of the transition to EVs.
Trading on a price-to-earnings ratio of 8.6, Halfords is exceptionally cheap. Although its shares are likely to struggle to recover in the short run as a result of that weak consumer outlook, they offer substantial long-term growth potential. Hold.
Questor says: hold
Ticker: HFD
Share price at close: 226p
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