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3 reasons why GUD Holdings Limited is still overpriced

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.

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 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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