Interactive Investor

This is why Halfords shares are up 33% today

1st October 2020 14:51

Graeme Evans from interactive investor

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Halfords shares have been in decline for five years, but they have just hit a purple patch.

The cycling and staycation trends boosting Halfords (LSE:HFD) continue to surprise investors after the high street retailer produced another big upgrade to profit forecasts today.

Shares jumped a further 33% to their highest level since May 2019 after the company revealed that like-for-like sales surged 22% in the five weeks to 25 September.

This included a 46% jump in cycling and 7.5% in the higher margin motoring category, as healthier alternatives to public transport during the Covid-19 pandemic have continued to prove popular beyond the peak summer months.

Halfords now thinks half-year profits will exceed £55 million in interim results due on 18 November, having previously given a range of £35 million and £40 million just a month ago.

The group remains cautious about the second half of the year, particularly as a second wave of Covid-19 looks like it will be more disruptive than predicted a few weeks ago.

But the latest forecast puts Halfords in a good position for now, particularly when set against its most optimistic of three scenarios in July for full-year underlying profits of between £10 million and £20 million. It made a surplus of £55.9 million in the year to April.

Adam Tomlinson, an analyst at Liberum, upgraded his 2021 profits forecast by 48% and installed a new price target of 350p, compared with 300p previously.

He said Halfords was not only capitalising on current market tailwinds, but continues to evolve the business towards a more service-led, higher margin, higher returns model.

Peel Hunt predicts the company will be nearly debt free by the end of the financial year, meaning that a return to dividend list should come sooner rather than later. It adds that the current single-digit price/earnings multiple was too low for an improving business with persistent industry tailwinds, including government support for cycling.

The broker said: “The bears suggest that after this bumper profit year, Halfords will return to the uninspiring norm. That misses the point that Halfords is improving as a business.”

Peel Hunt has a price target of 250p, while Investec Securities has upped its target from 245p to 285p after today's unscheduled update.

CEO Graham Stapleton, whose turnaround strategy in 2018 refocused Halfords as a services-led business, recently highlighted some of the opportunities for the company in a post-Covid world.

As well as more journeys by bike, car or scooter, he predicted rising demand for servicing of older cars as the recessionary environment leads to consumers keeping vehicles for longer. Aversion to foreign travel and lower discretionary spend should also mean a continued rise in staycations, he added in the presentation to investors last month. 

Read all about it – newspaper firm soars

Shares in Smith News owner Connect Group (LSE:CNCT) were also sharply higher today after it said trading in the final quarter of its financial year had been stronger than expected following the easing of the UK's lockdown restrictions.

The newspaper and magazines distributor now expects underlying earnings of up to £39 million for the year to August 2020, which is above the top end of the guidance issued in July. The performance has continued into September, helping shares to rally 20% to 22.3p.

Analysts at Berenberg, who upgraded the stock to a ‘buy’ recommendation in July, said the recent disposal of parcels business Tuffnells had simplified the investment case.

They added today: “While the newspaper market is in structural decline, management has completed consistent cost-saving programmes that have supported profitability. This should lead to high cash generation to de-gear the balance sheet.”

The Covid-19 pandemic was no barrier to Bury-based flooring specialist James Halstead (LSE:JHD) delivering another record total dividend alongside today's annual results.

The £1 billion market cap company, which has been listed on the London Stock Exchange for more than 70 years, announced an unchanged final dividend of 10p a share for a total of 14.25p, up 1.8% on last time. Profits were 9.2% lower at £43.9 million.

CEO Mark Halstead rated his team's performance as “five-star” after overcoming the effects of a major production line breakdown and three months of pandemic disruption. Revenues were 5.7% lower at £238.6 million as the company undertook projects as diverse as the renovation of Moscow subway trains and NATO barracks in Lithuania.

Shares rose 6p to 490p, but Panmure Gordon analyst Adrian Kearsey has a ‘buy’ recommendation and 575p target price. He added: “The group’s investment in new product launches, exposure to healthcare markets and international reach have helped to protect earnings.”

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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