Investing.com -- Analysts at Stifel have upgraded their rating on Travis Perkins (LON:TPK) to "buy" from "hold," citing a historically low share price and a compelling risk-reward profile.
While acknowledging that the move may be early, Stifel analysts are confident that new Chairman Geoff Drabble will sustain the company’s improvement efforts, bring in a high-caliber CEO, and position the company for a cyclical recovery.
They also believe that the firm’s 2025 estimates are conservatively set and that earnings could double if Travis Perkins recovers the 15% of lost volumes from 2021.
With a price target of 750p unchanged, analysts see nearly 50% upside in the stock.
Marking freehold assets to market values suggests a tangible net asset value of 820p per share, while discounted recovered earnings yield 744p. A discounted cash flow calculation also supports a valuation of 750p.
Travis Perkins shares are currently trading at levels seen only twice in recent decades—during the global financial crisis when the company’s balance sheet was under pressure, and in 2000 during the fallout from the dot-com boom.
Despite cutting estimates, Stifel maintains the 750p target price, as the company’s recovery trajectory becomes clearer.
The company’s Merchanting division has lost about 15% of its volumes since 2021 due to the impact of rising interest rates and weakened consumer purchasing power.
A recovery in these lost volumes at a 20% margin drop-through rate could drive earnings back to 95p per share.
Even at a lower drop-through rate of 10%, earnings would still double from current 2024 levels.
New Chairman Geoff Drabble has an extensive track record in the industry, having previously served as CEO of Ashtead (LON:AHT) and held board positions at Howden Joinery and Ferguson.
Stifel analysts see Drabble as a stabilizing force, ensuring continued progress on operational improvements even as the company searches for a new CEO. His industry knowledge positions him well to select a leader capable of sustaining long-term changes.
Drabble has already implemented measures to address key challenges at Travis Perkins, including introducing short-term bonus incentives and sales commission programs to reignite a competitive approach.
In the longer term, his strategy includes leveraging technology to improve efficiency and enhance service offerings.
Analysts also note that he has prioritized empowering local management teams, a model that has driven success for competitors such as Ferguson, Howden, and MKM.
A rebound in the UK’s residential repair, maintenance, and improvement (RMI) sector is viewed as a matter of "when, not if," according to Stifel.
Housing transactions and new home construction are picking up, mortgage rates are expected to decline further, and rising wages are strengthening consumer balance sheets.
These factors collectively create a favorable backdrop for increased home improvement activity.
Historically, Travis Perkins’ Merchanting business has shown a strong correlation with housing transaction volumes, with a six-month lag.
Data indicates that housing transactions, which hit a low of 1 million in the 12 months ending March 2024, have rebounded to 1.13 million in the year to February 2025.
The UK’s Office for Budget Responsibility (OBR) projects this figure will rise to 1.15 million in 2025 and 1.24 million in 2026.
Despite a slow start in 2025, Stifel analysts expect RMI activity to strengthen, especially as consumer confidence remains resilient.
While planning approvals for home improvements have not yet surged, they are stabilizing, indicating potential for future growth.
Another potential catalyst for Travis Perkins is the emergence of QXO, an industry consolidator launched by Brad Jacobs in June 2024.
Jacobs, who previously built multibillion-dollar companies including XPO, GXO Logistics, and United Rentals (NYSE:URI), has expressed ambitions to turn QXO into a leader in the $800 billion building products distribution market.
QXO has already secured an $11 billion acquisition of Beacon Roofing Supply (NASDAQ:BECN) and made an unsuccessful bid for Rexel (EPA:RXL), a French electrical supply distributor.
Given its aggressive expansion strategy, Stifel analysts suggest that QXO may target other companies in the European market, potentially including Travis Perkins.
Travis Perkins’ real estate holdings present further valuation upside. The company’s 2024 annual report lists its freehold property at a historic book value of £433 million.
However, a 2023 company estimate placed the market value of its freehold assets at £1.1 billion.
Adjusting for this revaluation, the tangible net asset value per share would rise to 820p, underscoring the stock’s undervaluation.
Despite the positive outlook, Stifel acknowledges risks that could slow Travis Perkins’ recovery. The Merchanting division’s turnaround is not yet evident in financial results, with like-for-like sales declining 8% in Q3 2024 and 7% in Q4.
Stifel analysts note that while pricing has stabilized, volume growth remains uncertain.
Competition from independent players such as Huws Gray, MKM, and IBMG is another challenge. These competitors have expanded through acquisitions and organic growth, making them formidable rivals.
Additionally, Jewson, owned by Stark, is undergoing a turnaround under the leadership of former Travis Perkins CEO John Carter, further intensifying competition in the sector.
The company has set a cautious outlook for 2025, guiding for flat operating profits before property gains.
While improvements in Toolstation UK and Toolstation Benelux are expected, Merchanting may face further near-term pressure due to higher operational costs related to turnaround efforts. Property profits are also expected to come in lower than previously forecast, at £3 million for 2025.
Stifel analysts have adjusted their estimates accordingly, projecting Merchanting like-for-like growth of -0.3% in 2025 and a return to modest growth of 3.1% in 2026.