Baumart Holdings Limited (ASX:BMH), a AUD$35.46M small-cap, is a trading and distribution company operating in an industry which is facing massive upheavals from industry convergence, and new forms of competition and business models. Capital goods analysts are forecasting for the entire industry, a strong double-digit growth of 15.30% in the upcoming year, and a strong near-term growth of 21.38% over the next couple of years. However, this rate came in below the growth rate of the Australian stock market as a whole. Below, I will examine the sector growth prospects, and also determine whether BMH is a laggard or leader relative to its capital goods peers. See our latest analysis for BMH
What’s the catalyst for BMH’s sector growth?
Distributors are increasingly focusing on improving efficiency and cost-cutting as new forces continue to disrupt traditional distribution models. Technological advances have brought about new competitors, such as Amazon, and while some distributors feel that e-tailers can’t match their personal approach, many customers may feel differently as buying online becomes cheaper and more efficient. In the previous year, the industry endured negative growth of -4.58%, though still outperfoming the wider market growth of -4.59%. BMH leads the pack with its impressive earnings growth of 29.68% over the past year. This proven growth may make BMH a more expensive stock relative to its peers.
Is BMH and the sector relatively cheap?
The distribution sector’s PE is currently hovering around 12x, in-line with the Australian stock market PE of 16x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a lower 9.59% compared to the market’s 11.92%, potentially indicative of past headwinds. Since BMH’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge BMH’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? BMH recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto BMH as part of your portfolio. However, if you’re relatively concentrated in distribution, you may want to value BMH based on its cash flows to determine if it is overpriced based on its current growth outlook.
Are you a potential investor? If BMH has been on your watchlist for a while, now may be the time to enter into the stock, if you like its ability to deliver growth and are not highly concentrated in the distribution industry. Before you make a decision on the stock, take a look at BMH’s cash flows and assess whether the stock is trading at a fair price.