In a falling market, I think that Howden Joinery Group (LSE:HWDN) is a bargain FTSE 100 stock that I’d like to add to my portfolio. The company’s share price has fallen by just over 30% since the beginning of the year and it’s reached a point where I’d consider it materially undervalued.
Howden’s is a supplier of kitchens to the building trade. The company’s products include fittings, appliances, and joinery products.
I think that Howden’s stock is a bargain at the moment. In order to see why, let’s look at why the share price has been falling and why I believe it’s undervalued at these levels.
Why has the Howden Joinery share price been falling?
In my view, the main reason that the Howden’s share price has been falling is the macroeconomic outlook. The outlook for economic growth in the UK is currently weak and inflation is high. Both of these are negative for a business like Howden’s.
Weak economic growth may well present a problem. If the economy struggles, consumers are more likely to delay or abandon plans to buy new kitchens, which would weigh on Howden’s revenues.
The macroeconomic outlook therefore appears to be a challenge for Howden’s. I think this is what’s been pushing the share price down since the start of the year.
Why is the stock a bargain?
While I think there are good reasons the Howden’s share price has been falling, I also believe that it has now fallen so far that it’s a bargain.
The current share price values the entire company at total of £3.85bn. The company also has around £76m in debt, which adds to the downside for an investor like me.
Last year, Howden’s generated £351.5m in free cash, which represents a return of around 9% per year. I think that’s extremely attractive.
Obviously, the macroeconomic situation means that Howden’s future cash flows might well be lower than they were last year. So forecasting a 9% return every year is likely to be unrealistic.
Nonetheless, in buying this stock, I intend to hold it for a long time. I don’t think that the economic downturn will last forever and when the outlook improves, I think that Howden’s will perform well.
In the meantime, I anticipate the company’s strong balance sheet should see it through. Howden’s current assets more than cover its total liabilities, which I think means it can make it through a tough period.
After that, if the company averages 2% growth per year, the return from an investment perspective is in excess of 10% on average over the next decade.
Conclusion
Howden Joinery Group is a cyclical business – it is likely to perform better when economic conditions are favourable and worse when they are more difficult. I think that a difficult macroeconomic environment is presenting a temporary buying opportunity. I’m looking to take advantage in my own portfolio.
