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Finding a growth stock to add to my portfolio doesn't always involve looking for the next big thing. I think there are plenty of established firms with great growth potential, and sound fundamentals.
One I discovered recently Coats Group (LSE: COA).
Let's break down the business and break down my investment case.
Spreading threads
The Coats Group is one of the world's leading yarn manufacturers with a presence in over 100 countries. It supplies thread and other sewing materials to its customers mainly in the garment and footwear industry.
Shares had a great 12-month period, rising 27%. This time last year, they were trading at 76p, compared to current levels of 96p.
To buy or not to buy?
Starting with the bull case, there's a lot to like about Coats Group, in my opinion. First, I think the business has defensive aspects. This is because no matter the state of the economy, or the budget of consumers, clothing is an important purchase for all. We all need to wear them, as this heat makes me want to wear less. In addition to this, the presence and experience of the company are also plus points.
Next, Coats' latest update, the half-yearly report released in early August for the six months ended 30 June 2024, made for good reading. From a financial perspective, revenue increased by 7% compared to the same period last year. Also, its earnings per share, margin levels, dividends, and free cash flow were all high. Total debt is down, which is also a good sign. From a strategic perspective, cost-cutting and streamlining activities have helped the company save millions.
Speaking of dividends, the 2.3% yield helps my investment case. However, it is worth mentioning that benefits are not guaranteed.
On the other side of the coin, Coats shares may have some upside already. They trade at a price-to-earnings ratio of 18. This can be seen as high, and if earnings or trading takes a hit, the share price can fall.
Another concern of mine is the impact of inflation on costs and money due to the global economic instability. Increased costs can offset profits and returns.
Finally, I will keep an eye on its balance sheet and debt levels. Although it seems to have dropped recently, it is still close to $350m. Even if it is manageable, this is a huge cost to service and manage, especially in a high interest rate environment.
My decision
In my opinion, Coats' market position, experience, recent trading, and future outlook are all favorable. The current share price is a little bit better. However, the company's defensive prowess is hard to ignore, as well as the opportunity to break even.
When I next have the funds to invest, I will agree to buy Coats shares for return and growth.
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