The Australian share market has dropped by several hundred points since April 27, 2015. The S&P/ASX 200 (ASX: XJO) has lost almost 400 points, decreasing by almost 7% in value. This market correction, mainly the result of continued expectation of slow growth in the economy, has made many good businesses available at cheap prices.
Once such business is DuluxGroup Limited (ASX: DLX). On April 24, DuluxGroup was trading at a record high price of $6.71. Since then it has dropped by 13% to $5.80 as at the June 19 close. At this price DuluxGroup has fallen within a range of "a buying opportunity".
It comes as no surprise that a director of DuluxGroup purchased an additional 10,000 shares on June 15. When company insiders are buying shares, it often signals that the stock is undervalued.
Over the last three years, DuluxGroup's share price performance has been good. During that time total shareholder return on an average annual rate basis has been an impressive 29.2%.
Although DuluxGroup is more commonly known for its paint businesses, it has four other related divisions. The paints and coatings business is the largest contributor to its revenue and profit. Other business divisions are smaller, but profitable, except for garage doors and openers.
Dulux paints and some of DuluxGroup's other brands have been around for years and are well known and trusted. Apart from Dulux, brands like Selley's, Yates, Berger, and British paints are firmly established in the Australian and New Zealand markets. An expansion of the business in the Asian markets, particularly in China, is providing further opportunities for growth outside Australia and New Zealand.
Looking at the past five-year performance, it is quite obvious that since demerging from Orica Ltd., in 2010, DuluxGroup has successfully grown the business. Each year since 2010, revenue and profit has been higher than the previous year. For the recent half-year financial results ending on March 31, DuluxGroup reported a 9.3% increase in net profit after tax.
Foolish takeaway
There is no doubt that DuluxGroup is a quality business with strong growth prospects. The recent fall in the stock market has made many good businesses available at an attractive price and DuluxGroup is among them. It has acquired higher debt levels on its balance sheet, but an interest cover ratio multiple of 7 allows it to service the debt comfortably. In my opinion, adding DuluxGroup to the portfolio at any price below $6 will provide above average long-term returns for investors.
