Broker snap: Resilient Halfords undervalued

15th Jun 2010 12:37

Income investors should take a look at Halfords in the view of FinnCap, which has initiated coverage of the car parts and cycles retailer."Following very solid preliminary results from Halfords, we initiate coverage of the company with a buy recommendation that is based on the resilience of the group's core trading format and its strong cash flows which underpin an attractive dividend yield in a sector context," said FinnCap analyst David Stoddart.Stoodart notes that the company reduced net debt from £176m to £155m last year despite splashing out £72m to buy Nationwide Autocentres. The stock is the fourth highest yielder of the retail stocks the broker covers "and boasts a more sustainable business model than those that rank above it."With the company targeting 15% annual growth in earnings per share (EPS) "over the next three years or so" and Stoddart thinks the company will not achieve this without making more acquisitions. That raises the prospect of the management moving outside of its field of retailing expertise, while Stoddart also hints at the high incidence of value destroying acquisitions in British corporate history ("This is not the place to rehearse the last two decades of academic research on acquisition success rates")."The company's message is that the management team has wide experience of different sectors of retailing and will be able to integrate suitable deals," the broker says, adding that while "the strategy can work for Halfords ... there are good reasons not to count on it."As a result of this the broker's target price of 680p is well below its 745p discounted cash flow valuation of the shares.