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.

However, there is another small cap stock with much more growth potential, and a more convincing BUY thesis. It also offers a 7% grossed-up dividend yield! Our top analyst recently dubbed it, "The Motley Fool's Top Dividend Stock For 2014 - 2015". Indeed, the share price of this growing company is still only about 5% above the price 2 directors paid quite recently and the CEO owns over 15%! Discover this stock now, before it's too late.

Best of all: You can get its name and code of this ultra-promising stock for FREE! Just click here to download your free copy of "The Motley Fool's Top Dividend Stock for 2014-2015" today.

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

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.