This builders' merchant is well placed to profit from Help to Buy, says Phil Oakley.
Travis Perkins traces its roots back over 200 years, but today's company arose from the merger of Travis & Arnold and Sandell Perkins in 1988. The group has been very successful at growing on its own, as well as buying competitors and entering new markets.
It is Britain's biggest builders' merchant, with a 15% market share. As well as selling building materials to tradespeople and the construction industry, it has strong positions in the markets for plumbing, heating and interior building materials, such as flooring and drywalls. With the Wickes and Tile Giant chains, it also has significant exposure to the DIY market.
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Travis Perkins has been very well run for many years, but its fortunes are inextricably linked to the British economy and construction in particular. This has made it a classic boom-to-almost-bust' investment over the last decade.
At the height of the last boom in 2007, its shares were trading at over £21. Just 18 months later, you could buy them for just over £2, as profits collapsed. In 2009 the dividend was stopped and shareholders were asked for £300m to shore up its finances.
But the shares have done very well over the last five years and are up by more than 60% in 2013. Is the good news priced in, or is there still more to go for?
What does the future hold?
According to economists from Markit, new houses are being built at a rate of 40,000-45,000 per quarter, compared with 28,000 at the end of last year, and 57,000 in the four years to 2007. This means more deliveries of materials to building sites and more money for Travis Perkins.
However, it's the second phase of Help to Buy that could see a further uplift in sales and profits. The company sells lots of products for repairs, maintenance and improvements. Spending on these areas tends to rise when people move house.
So far this year, house moves have increased by nearly 25% and are running at around 95,000 a month. That's still a long way short of the 155,000 a month seen in the boom years, but the firm is optimistic that the second phase of Help to Buy will push the figure up to around 120,000.
However, there is usually a gap between when people buy houses and when they start spending money on them. This means that the company won't benefit from the uptick in people moving house until 2014 providing buyers have enough money left over, that is.
Travis Perkins is not just relying on the construction market. It has an ambitious strategy to grab a bigger share of existing builders' merchant markets, move into related ones, and become more efficient.
As well as growing its merchant depot sites by ten to 15 a year, and adding Toolstation outlets, I wouldn't be surprised if the company goes out and buys some of the bigger local firms still out there. This would boost its formidable buying power and help profits grow.
There's also a lot it can do with Wickes. Households are not splashing out on DIY at the moment, so the goal is to make Wickes a serious option for tradesmen by focusing on value for money. It is also likely to increase the number of Wickes stores across Britain.
Other areas of expansion include bathroom and interior building supplies. By spending more on where it can get the best bang for its buck, the company reckons it can grow trading profits by more than 10% a year for the next three to five years, and boost its return on capital by 2%-3%.
That would be good for shareholders. The company is also feeling confident enough to pay out a bigger slice of its profits each year, which should see a big increase in dividends.
It's not all plain sailing. Travis Perkins' lines of business makes it a riskier investment than many. It also has a lot of fixed costs, because it rents rather than owns most of its outlets, making profits very sensitive to changes in sales.
Long-term shareholders will know of the pain this can bring, but with business picking up there's a good chance that profits in coming years could be higher than many analysts expect.
The shares are not cheap on 17 times 2013 earnings, but this falls to 14.7 times next year's forecast profits. Travis Perkins looks like it is still building earnings momentum and that's what could drive the share price higher still.
Verdict: buy
