Halfords Motors Ahead

The Week: Morningstar columnist Rodney Hobson is impressed by the dramatic change in outlook at bike and car parts retailer Halfords

Rodney Hobson 2 October, 2020 | 9:08AM
Facebook Twitter LinkedIn

The Week

The best bit of a stunningly good trading update from cycling and motoring parts retailer Halfords (HFD) is that sales are going well irrespective of whether the customer is self-propelled or engine driven. The improving trend in cycling reported in the last update a month ago has continued while motoring products and services have returned to growth during September. Sales are running ahead of the company’s own expectations.

The end of summer weather and the staycation season has not dampened the enthusiasm for two wheels: cycling sales are up a remarkable 46% like-for-like over the past five weeks. Autocentres are now growing at 18% on the same basis and 46% including acquisitions.

Halfords is no longer freewheeling as it did for many years. It is now recruiting skilled staff across the country and looking to expand further. It is forecasting underlying pre-tax profits for the first half to the end of September to be more than £55 million, a dramatic increase from the £35-40 million indicated as recently as 8 September.

Management is taking a sensibly cautious view for the second half, given the potential for further waves of Covid-19 and the uncertain economic outlook. However, if we have to scale back on spending then cycling and spare parts for existing aging vehicles will continue to be in demand.

The shares shot up 20% on the update and are now higher than they were before the stock market collapse in spring but they are still only at a 14-month high. I think they will continue to edge higher as long as sales keep rising. Existing shareholders should stay in for the ride.

If you gritted your teeth and stuck with car dealer Pendragon (PDG) through thick and mainly thin you will not want to quit now with the shares at 7.7p. They have been as low as 5p recently but there could be light at the end of a very dark tunnel.

The pandemic, which involved the closure of outlets, cost £44.1 million in lost operating profits but the owner of the Evans Halshaw chain of showrooms reported underlying pre-tax profits of £7 million in July and August. That’s a welcome change from the £190 million losses run up in the past two financial years.

If you look for dividends, as I do, you won’t be interested. It will be a long time before Pendragon is in a position to pay out. However, if you fancy a wreck that could even yet be put back on the road, do take a look.

Expect More Bad News

One problem arising from the sharp downturn in the coronavirus-affected second quarter is judging which companies are genuinely bouncing back and which are merely flattering to deceive.

In is the latter category is newspaper group Reach (RCH), owner of the Mirror and Express titles plus a range of regional newspapers. Digital advertising and newspaper sales have recovered after the summer clampdown and Reach reckons that big national advertisers are eyeing up regional publications for targeted campaigns.

Profits came in higher than expected for the half year to June 28 but I remain unconvinced that Reach is coping any better than other newspaper groups with the switch from dying print to vibrant digital. Revenue tumbled with print sales 20% lower and while digital traffic improved slightly advertisers stayed away. So profits were still down, just not as much as forecast.

The performance over the past three months is described as “materially ahead of market expectations” but print circulation figures are still down 6% on pre-coronavirus levels, while total revenue remains 15% off.

The shares stood at 180p in mid-February. They are now below 80p. There could be more bad news to come.  

 

 

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.

Facebook Twitter LinkedIn

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.