Is now the time to buy Marshalls?

(Image credit: Igor Golovniov/SOPA Images/LightRocket via Getty Images)

published 4 December 2024

Sometimes certain firms become stock market darlings. They generate outstanding and consistent returns for shareholders and are widely owned by professional investors. Often shares in these companies are at their riskiest when they are most popular, as prices become untethered from value. When things go awry, the share-price decline can be extreme but, after the fall, a great investment opportunity can emerge. One such former darling is Marshalls (LSE: MSLH), which was loved by numerous investors. It rewarded that love with a peak-to-trough decline of 80% in two years. Having been patently overvalued at their peak, the shares now look cheap. Might now be the time to buy this once-admired stock?

Marshalls produces and supplies landscaping, building and roofing products; it makes things like paving stones, concrete blocks and the various layers that go into constructing pitched roofs. These things may seem unglamorous in a world of AI and robotics stocks but Marshalls is an example of the kind of business that does seemingly simple things very well. From businesses that produce simple products well, great investment returns can be enjoyed. A £10,000 investment in the shares with dividends reinvested for the 25 years to September 2021 would have been worth £260,000.

However, since the shares peaked at just over 840p in September 2021, the return has been miserable, with the stock now at 350p. The company benefits from a strong construction market and suffers when construction is challenged. Following the global financial crisis in 2008, the cost of debt has been extremely low. This motivated a seemingly relentless boom in construction activity because property investors could finance projects very cheaply. This backdrop was the driver of Marshalls’ booming business and status as a market darling, with a lofty valuation to match. In 2022, inflation spiked. The proximate cause was increased conflict in the world, reducing the availability of raw materials and obstructing supply chains.

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Central banks raised interest rates. Suddenly, having binged on cheap debt, property investors had to withdraw from new investments. The knock-on effect was that demand for products produced by Marshalls declined. In reality, this was a marginal reduction in demand rather than an abrupt collapse. But firms such as Marshalls, with high fixed-cost bases, suffer outsized hits to profits when a marginal reduction occurs. Overall, revenues for the business have declined 15%, but profits have halved. One might therefore conclude that the low share price is, in fact, justified.

The cycle is turning, with large-scale building projects underway, while there is also political momentum behind greater construction activity. Marshalls sells most of its products in the UK and will therefore benefit from this. A third of Marshalls’ sales come from commercial, infrastructure and industrial production, where construction has already begun on a large number of projects. Around a quarter of the business sells to the housing repair, maintenance and improvement subsectors. Some activity here has been delayed, but expenditure is inevitable. In fact, the delay will have to be made up for by extra sales in the future, placing upward pressure on demand.

The largest part of the business deals with new-builds in the housebuilding sector. Demand in this market has been subdued recently because of higher interest rates placing upward pressure on mortgage rates. However, not all houses are built for owner-occupiers and we might be about to see a renaissance in the building of social housing. Thus, lofty though it might appear, should the government’s target of 300,000 homes per annum be met, there will have to be record levels, of demand for the products that Marshalls delivers. The result is that, far from being a fallen angel, Marshalls is a company whose best days may lie ahead of it.

Marshalls’ shares spent much of the decade before the 2021 peak trading at a price/earnings (p/e) ratio of more than 20, sometimes approaching 30 – a level that would be deemed expensive by most investors. Today, the p/e is once again around 20. However, the environment for construction means that the company may be under-earning by as much as half. In other words, should there be a return to strong construction markets, particularly in housebuilding, then the earnings for the business could easily double or more, and the p/e would fall to around 10. Compared with its history, this would be a remarkably cheap p/e and thus the shares could perform very well.

On its website, Marshalls boasts that its products can be found at every location on the Monopoly board: wherever there is building work occurring in the UK, Marshalls’ products won’t be far away. Indeed, it is likely that almost everyone, unknowingly, interacts with Marshalls’ products every day of their lives. Ultimately, Marshalls is a well-run business, where the quality of its operations is temporarily obscured by the UK construction backdrop. This backdrop will improve and when it does, Marshalls will be a major beneficiary. It may never become a stock market darling again, but when it is as uncommonly cheap as today, it doesn’t need to be for it to make a great investment.