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FTSE 100 stock Kingfisher (LSE: KGF) jumped to the top of the index leaderboard on 26 November. The share price flew up as the firm raised its profit outlook. While the rest of the index (and country!) were fretting about the newly released Autumn Budget, the owner of Screwfix and B&Q shrugged off any concerns, posting a 7.4% increase in the share price on the day.
With a dividend yield of over 4% and a share price up 22% in the last year, the stock looks attractive at first glance. But on closer inspection, we find a share price lower today than it was when Terry Venables was manager of the England football team. So which is it? Is this a bargain hiding in plain sight? Or one for investors to avoid?
Good news
Let’s start with the reason the shares jumped so much. The 7% increase – adding around £400m in market cap in a single day – came on the back of a second straight outlook hike. In other words, the firm’s future earnings are expected to come in higher than had previously been thought.
There are a few reasons that cause guidance to be upgraded. Sometimes it’s a sign of strong fundamentals, a good company firing on all cylinders. Other times it’s changes in the market, like higher consumer demand. Either way, it’s a very good thing for a company and therefore its stock.
Two of the best stocks to own in recent years have been US chipmaker Nvidia and British engineering firm Rolls-Royce. Both stocks are up over 10 times in value. What do they have in common? One answer: a recent history of beating their own (and analyst) predictions on earnings. Perhaps a similar bull run is coming for Kingfisher shares too?
To buy or not to buy…
It’s worth looking at the risks here as well. I’d say the plight of the UK economy is one potential threat. While it has operations overseas, its stores in Poland and France only make up around 20% of the total number.
Economic growth in Britain has been very weak since 2008. That is one reason the FTSE 100 has been eclipsed by its American counterpart the S&P 500. Actually, the problem is even more serious when looking at statistics on a ‘per head’ basis. Much of the meagre economic growth has been because of immigration. This could curtail the prospects of Kingfisher if politicians succeed in their stated aim of curbing this.
That said, the future is a hard thing to predict. I think we’re all crossing our fingers for a bit of a turnaround in the UK economy and, you know, it might even come. The recent good news for Kingfisher is cause to be buoyant about the stock too. I’d say it’s worth considering.
