3 reasons why GUD Holdings Limited is still overpriced

The share price is down, but this consumer appliance company is still too expensive

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GUD Holdings Limited (ASX: GUD) has today announced a poor result for the 2014 financial year, with underlying net profit falling 17% to $31 million, compared to the previous year.

The company, which distributes consumer appliances under the Sunbeam brand, as well as automotive, water-related and a number of industrial-type products, has been hit hard in recent years by a number of factors (more on them below).

Reported net profit was even lower at $17.7 million, after GUD paid for restructuring expenses and some one-off impairment costs totalling $13.3 million after tax.

Sunbeam appliances face intense competition from a host of international brands flooding into Australia, such as coffee machines, food processors, toasters and the like. Sunbeam competes mainly on price, and as such has very little competitive advantage – earnings for the brand fell 83% compared to 2013.

That's in stark contrast to Breville Group Ltd (ASX: BRG) – with its Breville brand competing in the premium segment, and its Kambrook and Ronson brands focused on the lower end of the market. The next time you wander through a Harvey Norman Holdings (ASX: HVN) or JB Hi-Fi Limited (ASX: JBH) Home store, you might want to check out the prices on their respective products.

On a positive note, GUD's other divisions, Davey, Automotive, Oates and Lock Focus all saw single digit growth in earnings. But the company still remains expensive at current prices for a number of reasons – here are three…

  1. Based on GUD's historical average price/earnings ratio of 13.3x and underlying net profit of $31 million, shares should be trading around $6.50.
  2. This is the third year in a row that net profit has fallen, and the company says it sees 2015 business conditions are likely to remain unchanged, perhaps suggesting a P/E ratio of 13.3 is too high.
  3. Net debt/equity remains high at 47%, and total debt has increased to more than $120 million, from $89 million in 2013.

At current prices, there's no margin of safety available for investors, and you may want to bypass GUD until there are positive signs for the company.

 Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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