Kingfisher: Long-Term Economics Of The Business Warrant A Buy

| About: Kingfisher plc (KGFHF)
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Originally published on Dec 11, 2014

Kingfisher PLC ((OTCQX:KGFHF); £6.83 billion pound market cap) is a home improvement retailer, which through its subsidiaries supplies home improvement products. Kingfisher's subsidiaries (B&Q, Screwfix, Castorama, Brico Dépôrt and Koçtaş) operate across Europe with stores in the UK, France and Portugal, making it the largest European home improvement retailer and the third largest in the world (behind Home Depot (NYSE:HD) and Lowe's (NYSE:LOW)).

The major advantage with a large market share is the ability to sell products that consumers constantly want, allowing regular increases in price without fear of losing unit volume. This pricing flexibility allows return on capital and profit margins to be above average. The products sold are also not likely to be made obsolete by changes in technology, nor is demand for such housing products likely to disappear in the near future.

Recently the deteriorating housing market in France and the distraction of the World Cup have affected sales growth. This has resulted in weak consumer demand during the second quarter, leaving excess inventory and reducing sales numbers. In addition, the early warm weather in the UK resulted in high sales numbers during the first quarter, accounting for some backdrop in second quarter sales.

However volatile sales in the short-term are a poor reflection of the long-term prospects of the company. It is clear these problems are temporary, considering the European Central Bank has cut interest rates to 0.05% to boost the economy. Therefore what piques interest are the announcements of new store openings into new markets and the in-house appointment of Véronique Laury as the next chief executive.

With regard to the financial overview, the free cash flow and EPS have both been increasing at a CAGR of ~13% in the past 5 years which is above the FTSE 100 market return. I expect this value to increase even more due to the recommencing of the share buyback program. A low PE multiple of 9.7 times 2013 earnings is also well below the industry average, indicating Kingfisher is severely undervalued. Using a conservative growth rate, I value the intrinsic stock price to be 495p and therefore with a current price of 292p, Kingfisher has a margin of safety of 41%.

In summary Kingfisher is currently trading at a discount to its intrinsic value and considering the favourable long-term economics of the business, I strongly believe this upside is attractive enough to warrant a buy.

Disclosure: Long Kingfisher.

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