The DuluxGroup Limited (ASX: DLX) share price is steadily growing and has reached $6.42, will it grow or decline from here?
DuluxGroup is a home improvement business with a variety of products and it has a market capitalisation of $2.5 billion.
Here's why I think investors could be bullish or bearish on DuluxGroup:
The bull case
The DuluxGroup share price has been at this level for about a year, but the profit has increased in this time and it's now trading at better value. In its full-year report to 30 September 2016 it revealed that it grew earnings per share by 14.7%.
DuluxGroup has a number of high-quality brands including Dulux, British Paints, Selleys, Cabot's and Yates. Having well-known brands means Dulux will have a loyal customer base and it can increase prices without much detrimental effect. This will increase future revenue and profit at a nice rate.
Management have been smart by acquiring other home improvement businesses that will expand DuluxGroup's offering to customers. It currently offers products in categories such as paint coating, garden care, garage doors and cabinet hardware. It could eventually have a brand for every home improvement task.
Painting products are DuluxGroup's main source of revenue. Painting is a defensive source of revenue because property owners paint no matter the stage of the property cycle.
Painting is likely to occur when someone has just bought a house, is about to sell a house, is renovating a house, or when a property has just been constructed. As the Australian population and number of properties increase, DuluxGroup's revenue should increase in the long-term.
The bear case
DuluxGroup has admittedly been a slow grower over the last few years considering how much the property market has been soaring. DuluxGroup shares are currently trading at 18x FY17's estimated earnings, which isn't cheap for reasonably slow growth.
The Australian Competition and Consumer Commission recently took Dulux to court over its claim that InfraCOOL cooled down houses without any proof. Dulux will need to be careful and not alienate customers by charging customers more for products that aren't as superior as they are marketed. It can't afford to lose its quality and market-leading status.
Any property price crash may affect DuluxGroup's share price if investors become stale to property-related businesses, even if DuluxGroup does not lose much revenue or profit.
Foolish takeaway
DuluxGroup isn't going to shoot the lights out, but it could be a solid performer for any Foolish portfolio. It's currently trading at 18x FY17's estimated earnings with a grossed-up dividend yield of 5.34%. At this price I think DuluxGroup is reasonable value and can provide decent capital growth and income over the long-term.
If Dulux doesn't paint a good picture for you, perhaps this great dividend stock will.
