At first glance, there’s a lot for contrarian investors to like about Inchcape (LSE: INCH). Its 4.3% dividend yield for 2019, for starters, a figure which smashes the UK mid-cap of 3.3% by a handsome margin. And then there’s its corresponding forward P/E ratio of 10.4 times.
Investing in a different direction to the herd often involves a high tolerance of risk and this is no different for Inchcape. City forecasts of a return to earnings growth in 2020 may encourage many to take the plunge though. I’m not sorry to say that I don’t count myself in that number, and a fresh profit warning from fellow car retailer Lookers late last week intensified my worries.
With Inchcape’s own third-quarter trading details, scheduled for 7 November, I fear more heavy share price weakness across the sector could be just around the corner. I’d sell out today before it’s too late.
What about this monster yielder?
Okay, Inchcape’s earnings multiples and dividend yields are on the side of decent rather than spectacular, and so probably aren’t worth the hassle, given those worsening troubles for the UK car market.
But can the same be said for Halfords Group (LSE: HFD)? The troubles engulfing the retail sector isn’t confined to sellers of big ticket items like automobiles. Though could this particular FTSE 250 share be too good to miss, given its forward P/E ratio of 7.5 times — sitting below the accepted bargain benchmark of 10 times and below — not to mention its jaw-dropping 10.5% corresponding dividend yield?
Not in my book, I’m afraid. Halfords has seen its share price slump more than 50% over the past 12 months alone as Brexit uncertainty has hammered consumer spending levels and sapped demand for its bikes and car accessories. And with fears over the UK’s economic and political destiny set to drag well into 2020 at least, it’s quite probable shareholders will continue to frantically sell up.
10.5% yields!
Halfords certainly put the pre-Halloween chills into this Fool when it updated the market in early September. It wasn’t a surprise to see like-for-like revenues at its Autocentres rise 1.1% in the 20 weeks to August 16 — the need for MOTs and car repairs provide some earnings visibility — but the scale of sales erosion at its Retail division was shocking, down 3.9% year-on-year.
Sinking like-for-like sales of motoring products (down 5.9%) and cycles and related gear (down 1.1%) caused the trouble and brought underlying sales at group level down 3.2%. And the business expects conditions will remain difficult, with chief executive Graham Stapleton advising: “We believe the economic and political uncertainty impacting big-ticket discretionary spend will continue in the second half.”
Sales at Halfords are deteriorating at a rapid pace and this gives me cause for worry ahead of interims also slated for 7 November. The retailer issued a profit warning back in September and, given that the company has form in underestimating the challenges on the high street, it’s quite likely another one could be just around the corner. I’d sell it today before the share price sinks again.
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Royston Wild has no position in any of the shares mentioned. 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.
Motley Fool UK 2019
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