On Thursday, consumer, industrial and automotive products conglomerate GUD Holdings Limited (ASX: GUD) handed down a disappointing set of full-year results, sending its share price over 3% lower for the day.
The ex-owner of prolific consumer and industrial brands Sunbeam and Dexion announced that its recent divestment of these two business units contributed a $58.9 million net loss and dragged overall profits lower. This was despite resurgence across its automotive brands Ryco and Wesfill.
Whilst this result is clearly a one-off, I believe GUD's long-term success remains tepid given its existing businesses (ex-automotive) appear to be struggling in the current economic climate. Accordingly, with GUD's share price up a handy 36% since this time last year, I think it's worth taking another look at the stock to see if investors should take profits today.
Here's what I found.
Full-year results
In my opinion, GUD's full-year results were far from "good".
The company posted a full-year statutory loss of $7.3 million after tax, despite reporting that underlying revenue and profit from continuing operations increased 4% and 2% for the year, respectively.
The key driver for the improvement in underlying results was a standout performance in its automotive division, which saw earnings (EBIT) grow 10% year-on-year to $73.6 million, due to a combination of organic and acquisitive growth.
However, the disappointing fact was that GUD's other two staple divisions – Davey (water) and Oates (retail) – both went materially backwards during the year. As a result, underlying EBIT remained flat across the group.
Growth intact
Despite the results, management believes GUD's growth prospects remain intact. CEO Johnathan Ling commented that weak demand in the Australian water market, poor consumer sentiment, and adverse currency movements were the underlying cause of weakness in its Davey and Oates division, with both expected to rebound when conditions recover.
Although the resulting decline of 5% and 3% of sales revenue for the Davey and Oates divisions (respectively) remains substantial, management is convinced that 2017 was a year of transition with 2018 set to record growth across all business units.
I, for one, am not as sure.
Future prospects
Admittedly, GUD's automotive division is firing on all cylinders with the company having plenty of headroom to eke out organic growth from its new acquisitions. This is a positive for its share price.
However, I believe its other businesses remain in off form given their inability to capitalise on the housing boom to date. This is a worrying sign.
Foolish takeaway
Whilst it's arguable that Davey's niche market may see its fortunes turn through management's initiatives for product innovation, I don't believe Oates' fortunes are as binary in light of the competitive retail environment.
Given the arrival of Amazon is set to increase competition in all-things retail, and sector heavyweights Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) continue to grow their own in-house offerings, I believe the Oates cleaning brand could remain under pressure and continue to be a drag on group earnings.
Accordingly, I would prefer to stay away from GUD and seek exposure to the rampant automotive industry by pursuing stocks like Bapcor Ltd (ASX: BAP) and Automotive Holdings Group Ltd (ASX: AHG) instead.
