Today I want to start by looking at a company that only floated on the London market in July. Value retailer Works co uk (LSE: WRKS), also known as The Works, sells a wide mix of arts, crafts, books, toys and stationery supplies. The firm operates from 479 high street stores, as well as online.
Works share price is up by 12% at the time of writing today, after an upbeat trading update reversed some of Octobers losses. Do I think this the right time to invest in this potential growth story?
Inside ownership
One attraction is that The Works is chaired by Dean Hoyle, who founded the Card Factory chain of shops. Mr Hoyle grew Card Factory from a market stall to a company with annual profits of 50m in just 12 years.
Mr Hoyle sold some of his shares in The Works in the companys IPO, but still has a 14.2% shareholding I estimate to be worth about 12m. This should mean his interests are well aligned with those of smaller shareholders.
Several of the firms senior managers also have stakes of around 1%, giving them a significant interest in the business.
Are the shares a buy?
The firms accounts suggest that this business isnt quite as profitable as Card Factory. Sales of 192m in 2017/18 generated an operating profit of just 6.2m. Thats equivalent to an operating margin of just 3.2%, well below the greetings card retailers figure of 18%.
The Works is also operating with a significant amount of debt. Net debt was 24m at the end of April. Thats twice the groups adjusted earnings before interest, tax, depreciation and amortisation (EBITDA).
In addition to this, the company is committed to future lease payments of 135m on its store estate.
Analysts expect the firm to report adjusted earnings of 9.1p per share this year, rising by 30% to 11.8p per share in 2019/20. These forecasts put the stock on a price/earnings ratio of 16 for the current year, falling to a P/E of 12.3 next year.
Dividend payments are also expected, with a forecast yield of 2.5% this year and 3.2% next year.
The Works expects to open 50 new stores in 2018/19, and a similar number the following year. If this expansion can be achieved without any loss of profitability, then I think the shares could be a decent buy at current levels.
My concern is that the firms slim margins and big store estate leave it vulnerable to rising costs and the high street slowdown. For these reasons, I wont be investing at this time.
One creative company I do own
Some of The Works customers are probably also customers of Harry Potter publisher Bloomsbury Publishing (LSE: BMY).
The schoolboy wizard isnt Bloomsburys only success. The firm also sells academic books and non-fiction coffee table titles, for example. Sales have risen from 109m to 161m since 2014, while profits have risen from 7.7m to 9.1m over the same period.
The groups profit margins are slightly lower than they were, but cash generation remains strong and the group reported a net cash balance of 17m at the end of August.
Since peaking at more than 250p in June, Bloomsburys share price has fallen by more than 20% to about 195p. This puts the stock on forecast P/E ratio of 13.4, with a dividend yield of 4.1%
I hold the shares myself and would consider buying more at this level.
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