COATS (COA)

Shares - - TALKING POINT -

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.

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