The Reliance share price torn between its profit results and outlook

The Reliance Worldwide Corporation Ltd (ASX: RWC) share price will be on watch this morning as the general lack of bad news in its full year results runs head-on with a profit downgrade.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Reliance Worldwide Corporation Ltd (ASX: RWC) share price will be on watch this morning as the general lack of bad news in its full year results runs head-on with a profit downgrade.

The thing working in Reliance Worldwide's favour is its sagging share price. One won't usually see this as an advantage but given that the RWC share price is trading at the bottom of its 52-week trading range as it fell 2.4% yesterday to $3.30, some level of bad news is already factored into the stock.

To be sure, there's room for the stock to play catch-up if it can convince investors that things are back on the right path given that the stock has slumped over 40% over the past year when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is up 3%.

This makes the stock one of the worst performers in the building materials sector but that bad boy reputation could soon be passed on to the Boral Limited (ASX: BLD) share price, which is down around 39% over the same period.

The small numbers more exciting than the big ones

Reliance Worldwide reported a 102% jump in net profit to a record $133 million for FY19 as revenue increased 43% to $1.1 billion because of its acquisition of John Guest.

The market would be expecting the big result but what is pleasing in my view is that revenue excluding the contribution from the takeover was 5%.

Further, adjusted earnings per share jumped by 23% to 19.4 cents a share, a tat ahead of the 19.2 cents that consensus forecasts were predicting. It's a small beat, but like I said, there isn't much good news in the stock and investors might be willing to overlook its margin squeeze from rising costs (like copper).

I was worried that the US-exposed business would turn in a shocker like Boral did as Reliance Worldwide had been impacted by unfavourable weather in the US during their winter. The season wasn't cold enough and that meant fewer burst water pipes!

Throw in the patchy building activities data and signs of an economic/construction slowdown across its key markets – the US, the UK and Australia – and you can see why investors weren't keen to back its sliding share price.

The big uplift in earnings prompted management to up its final dividend to 5 cents a share, taking its full year payout to 9 cents compared to FY18's 6.5 cents a share. Nothing for income investors to write home about, but again, every little piece of good news is a plus for this dog.

The black-lining to an otherwise reasonable result

However, what could cause this good news story to turn sour is the group's outlook. The volatile economic environment and the potential impact of a hard Brexit could take its toll on FY20 earnings with management forecasting net profit of $150 million to $165 million for the current financial year.

This means net profit could be flat or it could jump 9%. The market may not react well to this as consensus were tipping around a 14% increase in adjusted EPS for FY20.

Brendon Lau owns shares of Boral Limited. Connect with him on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Reliance Worldwide Limited. The Motley Fool Australia has recommended Reliance Worldwide Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

A man looking at his laptop and thinking.
Share Gainers

Here are the top 10 ASX 200 shares today

Investors finished the trading week on a sour note today.

Read more »

Happy teen friends jumping in front of a wall.
Share Gainers

4 ASX 200 stocks smashing the benchmark this week

Investors are sending these four ASX 200 stocks soaring this week. But why?

Read more »

A happy young couple lie on a wooden deck using a skateboard for a pillow.
Broker Notes

Bell Potter says this growing ASX 200 stock can rise over 40%

Big returns could be on the cards for buyers of this stock.

Read more »

Broker written in white with a man drawing a yellow underline.
Broker Notes

Brokers name 3 ASX shares to buy today

Here's why brokers are feeling bullish about these three shares this week.

Read more »

A couple makes silly chip moustache faces and take a selfie on their phone.
Share Market News

Which delivered superior returns in FY25: CSL, A2 Milk, or Telstra shares?

We review the share price growth and dividend income delivered to investors in FY25.

Read more »

Woman with an amazed expression has her hands and arms out with a laptop in front of her.
Share Gainers

Why IGO, Johns Lyng, Lynas, and Web Travel shares are pushing higher today

These shares are ending the week on a high. But why?

Read more »

Person with thumbs down and a red sad face poster covering the face.
Share Fallers

Why Imricor, Ora Banda, Ventia, and Vulcan shares are dropping today

These shares are ending the week in the red. But why?

Read more »

Man with rocket wings which have flames coming out of them.
Resources Shares

Up 23% today, why Macquarie forecasts this ASX 200 mining stock could rocket another 33%

Macquarie forecasts more outsized gains to come for this surging ASX 200 mining stock.

Read more »