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Can the GUD Holdings Limited share price ride the housing boom?

On Monday, the Fairfax Press revealed that UBS analysts believe housing-oriented retail stocks JB Hi Fi Limited (ASX: JBH), Harvey Norman Holdings Limited (ASX: HVN) and Adairs Ltd (ASX: ADH) are well positioned to ride the housing boom.

In its research note, UBS concluded that a resurgent housing market and upbeat consumer sentiment is likely to provide favourable conditions for retailers reliant on the housing cycle with the uptick expected to continue until at least mid-2018.

Accordingly, with GUD Holdings Limited (ASX: GUD) slated to release results on 1 February, I thought it would be a good time to take a look at this retail conglomerate.

GUD’s history

GUD has endured a tepid history with household consumables, selling in and out of housing-oriented consumer brands over the years.

Prior acquisitions

In 1996, GUD acquired consumer brand Sunbeam – best known for manufacturing small electrical and kitchen appliances.

From there, GUD accelerated its foray into Australia’s household consumables division. In 2005, GUD acquired home cleaning brand Oates and then built a 19.9% stake in listed kitchen and home appliances manufacturer Breville Group Ltd (ASX: BRG), before launching a fully-fledged takeover offer for it in 2009.

…and divestments

When the ACCC rejected GUD’s proposed takeover of Breville on competition concerns, GUD opted to divest its entire stake in Breville and focus on its Sunbeam business.

In a case of bad timing, the strategy coincided with the onset of the GFC. GUD’s Sunbeam division became a drag on profits, thus in its strategic review in 2015, managing director Johnathan Ling put Sunbeam up for sale.

Early last year, GUD announced it had sold its entire stake in Sunbeam to joint-venture owner, Sunbeam Products (trading as Jarden Consumer Solutions – the licencee of Sunbeam globally, except Australia and New Zealand). As part of the transaction, GUD also sold its 49% share in Jarden to all but exit the consumer division.

GUD’s future

Noting the recent divestments, it appears GUD’s strategy is to reposition itself away from prior ambitions of maintaining a diversified conglomerate exposed to the retail, automotive, industrial and security sectors.

Financial performance

The new strategy appears to be bearing fruits, seeing GUD’s shares rise almost 60% in the last 12 months as profits in its automotive division surge.

For the year ended 30 June 2016, GUD reported a solid 36% growth in underlying net profit after tax, thanks to a strong contribution from sales in its automotive brands Ryco and Wesfil (amongst others). Group revenues swelled 20% to $595 million, though the largest contributions came from non-housing related businesses.

Caveats

GUD’s current brands align the company’s operations to the industrial and business-to-business sectors, meaning investors looking to ride the coat tails of Australia’s housing boom (as per the UBS report) are unlikely to find those traits with GUD.

Foolish takeaway

In my opinion, GUD is no longer the consumer-to-business company of years past and therefore Wednesday’s results are sure to provide an insight on the sentiment of Australia’s other sectors.

Whilst the company appears to be in robust operational shape, it is not as exposed to the housing market as Myer Holdings Ltd (ASX: MYR) and Nick Scali Limited (ASX: NCK) are.

Accordingly, although GUD’s Oates division, and ancillary industrial businesses, should receive some upside from rampant housing construction activity (as evidenced by revenue growth in 2016), investors should not buy shares in GUD to simply gain exposure to the housing boom.

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Motley Fool contributor Rachit Dudhwala 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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