In times of trouble a good strategy is to turn to companies which have a long history of generating solid returns. Coats very much fits the bill and its shares look great value trading on 12.2 times forecast earnings for 2019.
Coats is a global market leader in the manufacture of threads, boasting a 20% market share. It is expected to grow profit by 7% next year and there is also a 1.8% prospective dividend yield.
Its threads are used across a number of industries including clothing where it keeps jeans and trainers together for customers including Nike, Adidas and Next (NXT).
It plays very well into the popular and growing trends of athleisure and fast fashion, where retailers are turning round new products very quickly to satisfy ever-changing public needs. As well as threads and yarns it provides the apparel and footwear industries with zips, reflective tape and interlinings.
One in five garments sold globally is held together using its thread. It also makes threads for tea bags and bedding, among other areas.
Coats’ performance materials division is really exciting. This develops innovative threads and fire retardant yarns for customers including Proctor & Gamble, Michelin and Ikea. Its products end up in a variety of places from airbags and car tyres to fibre optic cables and protective clothing.
Berenberg analyst Anthony Plom says the growth opportunity for the performance materials division is significant, now representing 10% of group sales.
Coats has a history of generating more than 20% return on capital employed, a metric which shows how well a company is investing money in capital to generate profit. A figure above 15% is generally considered to represent a good business.
Investors should note ongoing weakness in its North American Crafts arm and some analysts hope this part of the group will be offloaded in the future, although Coats hasn’t formally put it up for sale. Other risks to consider include an economic downturn which may depress demand, plus rising labour costs which could put a squeeze on profit margins. A forecast 2018 year-end net debt position of £152m is small relative to its £1.1bn market cap. James Goldstone, manager of Keystone
Investment Trust (KIT), says Coats is ‘the most exciting story I’ve found in industrials’ and says the shares are terrific value.
The fund manager says customers love Coats’ premium product and premium service. ‘But most importantly, it is the audited supply chain (which really appeals) for global brands who are determined to have an ethical supply chain.’
A GREAT VALUE SHARE WITH CLEAR GROWTH POTENTIAL AND A SUPERB TRACK RECORD
DISCLAIMER: Keystone Investment Trust referenced in this article has a holding in AJ Bell which is the owner of Shares magazine. The author of this article also holds shares in AJ Bell.