Broker snap: Wheels may be coming off at Halfords

7th Oct 2010 09:21

It could be time to get the puncture repair kit out for the deflated share price of car parts and bikes seller Halfords after Thursday's trading update raised, in KBC Peel Hunt's words, more questions than answers.Like for like sales in the company's second quarter fell, as widely expected, by 4.9%, with around 1.4 percentage points of this tail off attributable to the transition to a new national distribution centre."Car maintenance and camping enjoyed a positive trading quarter, with internet sales also performing well, up 60% yoy [year on year]," notes Peel Hunt analyst John Stevenson."In bikes, Boardman, Halfords premium brand, continues to perform well, up 60%. However, core ranges have suffered from price competition and new ranges were launched late. Ranges and price points are currently under review.," Stevenson added.The company has guided to a range of £67m to £69m for first half profit before tax, slightly below Peel Hunt's prediction of £69.5m.The broker is at the top end of the range of full year profit forecasts at £136.4m, and following the patchy trading update expects to trim that figure by around £5m. "In order to view the recent share price falls as being overdone, we need to retain confidence that the core business can deliver 7-10% EBIT [earnings before interest and tax] growth per annum over the medium term, with Autocentres also delivering significant traction," Stevenson states.After two quarters of "surprising trading weakness" Peel Hunt is losing faith in the company, formerly one of its top picks in the sector, and has downgraded the shares from "buy" to "hold". "With questions over bike ranges, pricing and Autocentre trading too, we believe it is right to step back and see how management addresses these concerns," is Stevenson's view.The analyst still has to plug the latest figures into his spreadsheet model and work out new profit forecasts. The price target, which was 600p, is now under review.FinnCap is keeping the faith, however, and sticking with its "buy" recommendation, saying "Halfords offers one of the sector's more attractive dividend yields."It does have some doubts, though. "Despite guidance that the company is on target to meet expectations, we might trim forecasts. Nevertheless, on traditional measures, the shares will probably continue to appear cheap. We therefore retain a Buy recommendation, albeit with fading conviction," said analyst Duncan Hall.