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The Reliance Worldwide share price is down 15% YTD: is it a buy?

The Reliance Worldwide Corporation Ltd (ASX: RWC) share price has fallen 15% so far in 2019 – I think it’s a good time to buy.

Background on Reliance Worldwide Corporation

Reliance Worldwide Corporation is a manufacturer of plumbing parts for residential and commercial applications. The group’s main focus is on residential repair and renovation. At the time of writing, the company has a market capitalisation of $2.97 billion.

Why I think it’s a buy

Reliance Worldwide Corporation sits on a price-to-earnings (P/E) ratio of 33.96x. This may seem expensive against the ASX 200, which currently has a P/E ratio of 18.20x; however, its results are expected to be significantly improved for the 2019 financial year, which will reduce its P/E ratio. Net profit for the first half of 2019 was up 58.38%, suggesting that the group is on track to report a huge improvement in earnings. This will be good news for shareholders.

The company trades on a grossed-up dividend yield of 2.54%, which isn’t a bad return. Additionally, the company had a pay-out ratio of just 58% in the last financial year. This means that there is plenty of room to increase dividends, especially as earnings increase. This will also put upward pressure on the share price.

Last year, the group acquired UK plumbing supplies business John Guest, which means that Reliance Worldwide is now the leading global supplier of a number of plumbing products. This business comes with a significant moat, as economies of scale and barriers to entry support Reliance Worldwide in maintaining an industry dominating position. This will likely allow the group to raise prices in the future, which will lead to additional increases in earnings.

The larger size of Reliance Worldwide will also help to improve already healthy margins. In the first half of the 2019 financial year, the group had a net profit margin of 13.76%. This means that the group is highly profitable on its sales and that prices for the lines it produces are not highly competitive.

Foolish takeaway 

Reliance Worldwide Corporation is growing earnings quickly. It has healthy margins and is increasing the size of its moat as it starts to dominate its market. There is huge potential for dividend increases and additional growth in the future.

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Motley Fool contributor Chris Chitty has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Reliance Worldwide Limited. The Motley Fool Australia has recommended Reliance Worldwide Limited. 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 Scott Phillips.

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