SIG plc (LSE:SHI), a GBP£1.02B small-cap, operates in the trading and distribution industry which is facing massive upheavals from industry convergence, and new forms of competition and business models. The level of change occurring in the marketplace is also providing opportunities. Online businesses continue to reshape customer and service expectations, and as those expectations shift to the B2B world, progressive distributors are finding ways to adapt those models to meet transforming market needs. Capital goods analysts are forecasting for the entire industry, a positive double-digit growth of 12.40% in the upcoming year , and an optimistic near-term growth of 29.91% over the next couple of years. However, this rate came in below the growth rate of the UK stock market as a whole. An interesting question to explore is whether we can we benefit from entering into the distribution sector right now. In this article, I’ll take you through the sector growth expectations, and also determine whether SHI is a laggard or leader relative to its capital goods sector peers. View our latest analysis for SIG
What’s the catalyst for SHI’s sector growth?
Distributors are increasingly focusing on improving efficiency and cost-cutting as new forces continue to disrupt traditional distribution models. Technological advances have brought about new competitors, such as Amazon, and while some distributors feel that e-tailers can’t match their personal approach, many customers may feel differently as buying online becomes cheaper and more efficient. In the previous year, the industry saw growth of 4.91%, though still underperforming the wider UK stock market. SHI lags the pack with its earnings falling by more than half over the past year, which indicates the company will be growing at a slower pace than its distribution peers. As the company trails the rest of the industry in terms of growth, SHI may also be a cheaper stock relative to its peers.
Is SHI and the sector relatively cheap?
The distribution industry is trading at a PE ratio of 16x, relatively similar to the rest of the UK stock market PE of 19x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. Furthermore, the industry returned a similar 13.35% on equities compared to the market’s 12.78%. Since SHI’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge SHI’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? SHI has been a distribution industry laggard in the past year. If your initial investment thesis is around the growth prospects of SHI, there are other distribution companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how SHI fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If SHI has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its distribution peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at SHI’s future cash flows in order to assess whether the stock is trading at a reasonable price.
For a deeper dive into SIG’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other capital goods stocks instead? Use our free playform to see my list of over 100 other distribution companies trading on the market.