Shares in industrial threads manufacturer Coats (COA) shot up 7.3% to 66.5p on news full year profits should beat management’s prior expectations. Analysts have upgraded forecasts and price targets following a strong start to the year. Coats’ apparel & footwear is a stand out, as is the performance materials business, the latter a key strategic focus for management.
With a rich heritage dating back to the 1750s, Coats is the world’s leading industrial thread maker as well as a major player in the Americas textile crafts market. It is also one of the few survivors of the Financial Times’ original FT30 stock index which dates back to 1935.
The company makes and supplies industrial sewing threads as well as zips to the clothing and footwear industries, as well as engineered threads and yarns used in everything from fibre optic cables to doctors’ surgeries, veterinary practices and even tyres.
Coats’ growth threads excite
As the chart below shows, investors are excited by the growth story at Coats, which today reports pleasing 3% group-level organic growth for the four months to 30 April. This was driven by a stronger than anticipated turn from its Industrial division, which delivered organic growth of 4%.
Sitting within Industrial is the apparel & footwear business, which house broker Peel Hunt believes received a boost from Coats’ strong relationship with Adidas and burgeoning sales with Nike.
The other part of the division is performance materials, where organic sales improved by 9%, reflecting a stronger US consumer durables market as well as ongoing growth in Asia and EMEA (Europe, the Middle East & Africa).
Letting the side down somewhat was Coats’ Crafts division, providing yarns for knitting as well as threads and needlecraft kits for embroidery. Organic sales fell 5% due to disruption caused by January’s tornado strike at Coats’ main distribution centre in Albany, Georgia.
Lost sales from the tornado are now estimated at $10m, although this is less than the initial $15m-to-$20m estimate and ‘the impact of lost profits and incremental costs of re-establishing operations in Albany are expected to be covered in full by the group's insurance cover’.
Encouragingly, Coats says ‘the US handknitting market has started to improve, with a return to point of sale growth at key retail customers in recent months.'
Coats’ margins should further improve thanks to the operational gearing on increased volumes and continued cost reductions, with management confident in stitching together further market share gains.
What the analysts are saying
Peel Hunt upgrades its price target from 70p to 72p and its 2017 taxable profits forecast from $150m to $156m, with estimated earnings per share (EPS) rising from $0.065 to $0.068. For 2018, the broker now looks for profits of $165m and EPS of $0.073, up from $158m and $0.069 respectively.
‘The company is sensibly cautious on markets, which should ensure that our new numbers are underpinned,’ writes analyst Charles Hall. ‘We believe the rating can continue to improve as management builds a track record. The shares should also be helped by entering the FTSE 250 in June, based on current market caps, having previously been excluded due to liquidity.’
UBS, which has an 80p 12 month price target for Coats, writes: ‘We believe today's trading statement will be taken positively by the market driving low-single digit consensus upgrades. We are Buy rated on the stock given its strong positioning in defensive markets and renewed balance sheet flexibility.'
