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Why Duluxgroup Limited paints a good picture for my watchlist

I’m always interested in how my shares are doing, I’m even more interested in shares that are high on my watchlist.

It’s impossible to buy every share that you think is good value at the time, which is why I’ve missed out on investing in DuluxGroup Limited (ASX: DLX) shares.

DuluxGroup is a home improvement company which owns many of the household brands that are leaders in their category. It owns Dulux, British Paints, Selleys, Cabot’s and Yates. Having all these different brands gives many avenues for growth and could be further complimented by more products.

I like DuluxGroup because paint is its main source of earnings. Paint is defensive in my opinion because if a property owner wants to sell their property, they will likely paint it. If someone buys a property and doesn’t like the wall colours they’ll likely paint it. If a family have been in their house for a few years and want to renovate, they will likely paint.

Painting is so inexpensive and a common activity for property that it should always be used.

In FY17 DuluxGroup reported that sales grew by 4%, earnings before interest, tax, depreciation and amortisation (EBITDA) grew by 5.2%, earnings before interest and tax (EBIT) grew by 6.5%, net profit after tax excluding tax provision grew by 7.3% and the dividend per share by 10.4%.

It was DuluxGroup’s ability to keep growing its margins which led to this impressive performance. The Selleys segment grew its EBIT margin from 11.6% to 12.9%, Lincoln Sentry grew its EBIT margin grew from 6.7% to 7.4% and the B&D Group grew its EBIT margin from 9.1% to 10%.

The property market is starting to slip, which may affect DuluxGroup. A decent portion of DuluxGroup’s business (around 15%) is focused in this area, however revenue has continued growing over the years, including through the GFC.

Foolish takeaway

There’s a chance that the market may view DuluxGroup negatively if the property market continues its decline. If sentiment does turn against DuluxGroup I think it could be the perfect time to buy some shares.

It is high on my watchlist and I hope that I can buy some shares over the next few months, hopefully the share price that I snap up will start with a $6.

Until DuluxGroup is trading cheaper, I will be looking to add these hot shares to my portfolio.

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Motley Fool contributor Tristan Harrison has no position in any of the 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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