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Actions in Ibstock (LSE: IBST) fell this morning (January 17) after the FTSE 250 The brick maker reported a 21% drop in sales for 2023.
There's no doubt that the market is tough right now, but I think Ibstock is starting to look interesting as a potential recovery option for my portfolio. This is why.
On track to meet profit forecasts
Last year's real estate slowdown is no secret, so I expected to see a drop in sales. Ibstock says full-year revenue is expected to have fallen 21% to around £405m last year.
We already knew that sales fell 14% to £223m during the first half of last year. Today's numbers tell me that this sales decline must have accelerated during the second half. I estimate second half revenues must have fallen 28% to £182m.
Fortunately, the company says that adjusted earnings for the year are expected to be in line with previous expectations, thanks to planned cost-cutting measures.
In my opinion, this is reassuring. It suggests that management has been able to judge the situation correctly and provide accurate guidance to investors.
The greenest bricks could be the winner!
Ibstock's cost-saving measures have included job cuts and the permanent closure of at least one factory.
But these changes do not mean that the company will permanently reduce its production capacity. Indeed, Ibstock is updating its product range and laying the foundation for future growth.
The group is currently opening a new modern factory in the West Midlands that will produce the UK's lowest carbon bricks. The first products are expected to ship to customers in the coming months.
The company is also investing in new production capacity at another plant to produce brick slats. These tile-like products are increasingly popular as cladding, to replicate the look of a traditional brick wall.
In total, Ibstock invested £65m in growth projects last year.
These changes should leave you with a “Portfolio of factories with fewer carbon emissions and more competitive”.
CEO Joe Hudson believes these changes will leave the business “well positioned to return to growth” when the markets begin to recover.
A recovery purchase today?
Although Ibstock's financial situation seems fairly secure to me at the moment, the company does have some debt.
I think the main risk for investors is that the current decline could be deeper and longer than expected. This could put pressure on the company's finances.
Of course, the future is always uncertain. But I think Hudson is taking the right approach. I'm sure demand for bricks will recover over time, as he has before.
Broker forecasts suggest Ibstock's earnings could fall to 10 pence per share in 2024, before recovering to 12 pence in 2025.
Those estimates value the stock at around 14 times forecast earnings in 2024, falling to a multiple of 11 times earnings in 2025.
Dividend forecasts of around 7p suggest the stock could also reward patient shareholders with a useful 5% cash yield.
Ultimately, I think Ibstock could be a profitable bet for recovery in the coming years. I think the stock looks interesting at current levels.
