The Wickes (LSE: WIX) share price rallied 11% on Friday after the company released a trading update for its fourth quarter. This made the stock the best performer in the lesser-known FTSE Small Cap index.
Wickes is a fairly new listing on the London Stock Exchange after it completed a demerger from Travis Perkins back in April. The share price hit a high of 288p on the first day of trading, but has drifted lower since. Before the update on Friday, the share price had dipped to 215p.
Has the trading update marked a turning point for the stock? Let’s take a look to see if it’s a buy for my portfolio.
Wickes and a demerger
Wickes is a major home improvement retailer in the UK. It describes itself as a digitally-led and service-enabled company that offers customers choice, convenience and value. Over recent years, it has rebalanced its business to service three types of customers it defines as: “Local Trade, Do-It-For-Me and DIY retail.”
When Wickes listed on the London Stock Exchange as a spin-off from Travis Perkins, it didn’t raise any new capital as part of the listing. Travis Perkins shareholders received shares in the newly listed firm, and had the option to either retain these shares, or sell them once trading began. This can sometimes place downward pressure on the share price of a spun-off company as shareholders opt to sell the shares and retain the original company in their portfolios.
The share price surges
It’s easy to see why the share price rallied on Friday. The company said trading has been resilient and raised its outlook for profit in fiscal/calendar year 2021. Revenue was actually in line with expectations, but margin performance was strong, which led to the upgrade in profit guidance.
I view this as a particularly good performance given the supply chain issues that most businesses are experiencing today. It signals that management is able to navigate supplier relationships very well, and that its business model is adaptive to these risks.
Is Wickes stock a buy?
I view the recent listing positively. Sometimes new companies that list via IPO have short histories, or require equity capital to invest for growth. This increases the risk of outright loss for a potential shareholder. However, Wickes is profitable with a longstanding history, which does de-risk the investment in my view.
There are still risks to consider though. For a start, there’s no guarantee that the management team will be able to mitigate supply chain issues indefinitely. Then, any slowdown in the UK economy will likely reduce demand for home improvement supplies.
However, I think the recent weakness in the Wickes share price reflects the selling pressure after the spin-off completed. The valuation looks compelling now as the shares are priced on a forward price-to-earnings ratio of only 10. I’ll be looking to add Wickes shares to my portfolio.
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Dan Appleby owns shares of London Stock Exchange Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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