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Finding a growth stock to add to my holdings doesn't always mean looking for the next big thing. I believe there are plenty of established companies that have tremendous growth potential as well as solid fundamentals.
A selection I recently found is Group of shelters (LSE: COA).
Let’s take a closer look at the business and break down my investment case.
Leaving the threads exposed
Coats Group is one of the world's leading thread manufacturers, with a presence in over 100 countries. It supplies threads and other sewing supplies to its customers, primarily in the clothing and footwear industries.
The shares have had a good 12 months, up 27%. This time last year they were trading at 76p, compared with current levels of 96p.
To buy or not to buy?
As for the bullish scenario, in my opinion, Coats Group has many positive aspects. Firstly, I think the company has defensive traits. This is because, regardless of the economic outlook or consumers' budgets, clothing is an essential purchase for everyone. We all need to wear it, even if this heat makes me want to wear it a lot less. In addition to this, the company's extensive presence and experience are also plus points.
Next up, Coats’ most recent update, a half-year report released in early August for the six months ending June 30, 2024, was a good read. From a financial standpoint, revenue was up 7% compared to the same period last year. In addition, earnings per share, margin levels, its dividend, and free cash flow all increased. Net debt declined, which is also a good sign. From a strategic standpoint, cost cutting and streamlining operations have helped the company save millions.
Speaking of dividends, a 2.3% yield favors my investment position. However, it is worth mentioning that dividends are never guaranteed.
Turning to the other side of the coin, Coats shares may already have some growth built in. They are trading at a price-to-earnings ratio of 18. This could be considered high and if earnings or trading were to take a hit, the share price could fall.
Another concern for me is the inflationary impact on costs and margins due to global economic volatility. Rising costs could impact profitability and returns.
Finally, I will keep a close eye on its balance sheet and debt levels. While it appears to have come down recently, it still stands at around $350 million. Even if it is manageable, this is a considerable amount to look after and manage, especially in a high interest rate environment.
My verdict
In my opinion, Coats' market position, experience, recent operations and future prospects are favourable. The current share price is a bit depressing. However, the company's defensive capabilities are hard to ignore, as is the opportunity to generate passive income.
Next time I have funds to invest, I would be willing to buy some Coats shares for profit and growth.
