DIY Value Investment

THE VALUE INVESTOR: Build up your potfolio with this undervalued stock that has inherent competitive advantages not threatened by online players

Emma Wall 13 February, 2014 | 2:42PM
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Twenty first century successful retailers need to nail the online market. If Apple is the tech stock to beat, Amazon is the biggest threat to most modern day retailers.

But according to equity research by Morningstar Select, large format DIY retailers have some inherent competitive advantages that should limit penetration by online and discount players to well below the retail average.

Equity analyst Philip Gorman and his team compared prices of almost 1,200 products on B&Q's website DIY.com to the same items on Amazon.co.uk and found that not only is B&Q competitive on price, but that it was leveraging its scale advantages to maximise pricing.

B&Q is owned by home improvement company Kingfisher (KGF) which also owns five other major DIY stores operating across Europe. Kingfisher makes price concessions where it has to in categories where no competitive advantage exists. But in more specialised areas such as flooring, kitchens, and heating, B&Q is more expensive. Making products instatntly available to consumers means bricks and mortar retail beats online when it comes to these kind of goods – consumers what to see, feel, try before they buy.

Specialising in one retail area has helped Kingfisher make efficiencies. A decade ago, the company was a multi-category retailer; and had no moat (competitive advantage). But since specialising in home improvement the company has built up a moat and one that low uncertainty.

Plus Kingfisher is a four-star rated stock, meaning analysts think it is currently trading at less than its fair value.

“Although the stock rallied in 2013, we believe there is still an opportunity to invest,” said Gorman. “With British house prices rising and the government propping up the housing market with its Help to Buy scheme, business momentum is gathering in Kingfisher's largest market. Our estimates are above consensus, and an upside surprise in the U.K. could be a near-term catalyst for the stock to reach our fair value estimate.”

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Emma Wall  is former Senior International Editor for Morningstar