Shares in floorcoverings distributor Headlam (LSE: HEAD) have risen sharply today following a strong trading update. It shows the business is making better than expected progress and seems to be well placed to record further growth over the medium term. However, does this mean its worth buying at the present time?
Its not long since Headlam reported that it was performing better than expected. In fact, on December 1 it saidits financial performance would be ahead of market expectations. Since then, it has recorded even better performance due in part to more favourable trading conditions. As such, it now expects to report results before non-recurring items thatare ahead of revised guidance.
Revenue for 2016 was 6% higher than in 2015, with a quarter of that growth being due to the weaker pound. The UK continues to account for the vast majority of total revenue at 88% and UK like-for-like (LFL) growth of 4.7% indicates that demand for the companys products remains robust. Similarly, constant currency growth of 3.6% in Continental Europe (which accounts for the remaining 12% of the firms total sales) shows that the performance of the business has been impressive across the board. And with Headlam benefitting from price increases thatcould continue in future, its in a strong position to deliver further growth.
A bright future
While Headlams bottom line is forecast to rise by just 3% in 2017 and by 4% in 2018, a positive catalyst on its share price looks set to be its dividend growth. It currently yields 4.4% from a dividend thats covered 1.6 times by profit. However, in 2018 Headlam is expected to record a rise in dividends per share of over 27%, which puts it on a forward yield of 5.7% and leaves its dividend coverage ratio at a still acceptable1.3 times.
Given the outlook for higher inflation and low rates for savings accounts, the companys increasing dividend could hold considerable appeal during the course of the next couple of years.
Butother stocks within the same sector such as Walker Greenbank (LSE: WGB) may have superior growth potential when it comes to the bottom line. For example, the companyis expected to record a rise in its earnings of 26% in 2018 and 7% the year after. However, much of this growth is already priced-in since it trades on a price-to-earnings growth (PEG) ratio of 1.8. And asit has a yield of 2.1%, it lacks income appeal compared to its sector peer.
Clearly, the outlook for both companies is somewhat uncertain. They both face a risky period where Brexit concerns could weigh on consumer spending as well as the wider UK economy. However, with sound income prospects and a business model and strategy that doseem to be working well, as evidenced by todays update, now could be the right time to buy Headlam for the long term.
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