Here’s why GWA Group Ltd shares have gone gangbusters today

Credit: umbrella

The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) may be having a slow start to the week, but it certainly isn’t the case for GWA Group Ltd (ASX: GWA). Its share price rocketed 22% higher in morning trade to a new 52-week high of $2.78 following the release of its preliminary final results.

This morning the leading provider of building fixtures and fittings to households and commercial premises posted net profit after tax growth of 15% to $51.9 million on revenue growth of 3% to $439.7 million.

After four consecutive years of declines in reported net profits, this result will no doubt come as a great relief to its long-suffering shareholders who have not had much to smile about for some time. Despite a booming housing market the company has been losing market share amid rising costs due to a weaker Australian dollar.

GWA has been busy divesting non-core assets in the last two years to allow it to focus on its Bathrooms & Kitchens and Door & Access Systems’ businesses. Management has done this as it believes each of these segments has a strong market position with capacity to grow.

This has proven to be the case with the company behind brands such as Caroma, Dorf and Fowler reporting growth in both these segments this year. Bathrooms & Kitchens posted a 2% increase in earnings to $84.6 million, while Door & Access Systems’ earnings of $7.3 million was up marginally on last year.

I believe today’s strong result is a testament to the great work management has been doing to strengthen its product offering, reduce costs, and improve the efficiency of its supply chain network. If it can carry this momentum into FY 2017 then the scene is set for another strong year ahead.

Although market indicators reveal an expected slow-down in housing construction, management has pointed out that new building activity remains at historically high levels. As GWA’s products are generally bought at the completions stage of the building cycle, a significant pipeline of work still to be completed should support continued demand for its products well into FY17.

Based on today’s results its shares are now changing hands at under 15x earnings despite the 22% jump in its share price. This may put it at a discount to plumbing parts provider Reliance Worldwide Corporation Aus P Ltd (ASX: RWC) and GUD Holdings Limited (ASX: GUD), but personally I believe its long-term growth prospects are not as great as these two shares.

For this reason I wouldn’t necessarily be rushing in to buy its shares after today’s surge in its share price. Things are certainly looking better for the company, but when new building activity does slow I expect profit growth will do so too unfortunately.

Instead of GWA these three new breed blue chips might prove to be better investments. Each pays a solid growing dividend and could jump higher in the next few months.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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 Bruce Jackson.

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