Thanks for the analysis, it inspired me to take a bit of a look at this business.
I'm not sure I'd be comparing NCK to ARB,CSL or RHC in terms of quality, and I think it deserves on a lower P/E multiple. Specifically, unlike the abovementioned companies, it operates in a cyclical environment and lacks a sustainable competitive advantage. Maybe I'm mistaken?
The 10 year period you have used blends two very different stories. The most recent (FY13-15), covers a period of unprecedented building approvals and housing growth. During this three year period profits rose 89% and same store sales experienced consecutive years of strong growth:
- FY13: 5.9%
- FY14: 6.3%
- FY15: 3.4%
The preceding 8 years aligned with a period of more subdued housing approvals and house price growth, and consequently over this 8 year period profits rose only 11% and same store sales suffered.
- FY05: (2.9)
- FY06: (9.7%)
- FY07: 0.5%
- FY08: (8.1%)
- FY09: (4.6%)
- FY10: 18.0%
- FY11: (1.6%)
- FY12: (1.9%)
My opinion is we are either close, or at the peak of the housing cycle, both in terms of housing price growth and construction, and any subsequent slowdown in residential property is likely to be reflected in NCK's profit growth.
A while ago I read somewhere (can't remember where), that the time to buy cyclical stocks was when they trade on a high P/E and the time to sell was when they trade on a low P/E. If that rings true, this may turn out to be a selling opportunity rather than a buying one.
In the medium term NCK may be able to mask declining sales by rolling out additional stores, but declining same store sales do not not indicate long term sustainable profitability to me.
Regards
Gralynchett
NCK Price at posting:
$5.00 Sentiment: None Disclosure: Not Held
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