Share of the week: Halfords back in fast lane?

The market wasn't expecting much from car parts and bike retailer Halfords this week, but with third-quarter sales beating forecasts and a special dividend lining investors' pockets, its shares are one of the FTSE 350's top performers. The City is split, however, and despite breaking above crucial resistance levels this week, some think this may be it for now.

Up 9%, Halfords easily outperformed a wider market in decline ahead of Donald Trump's inauguration. The shares broke above key technical resistance levels, including a 17-month bearish trendline, a long-established key level and 200-day moving average.

Like-for-like revenue jumped 5.9% in the 15 weeks to 13 January 2017, we heard, as a 7% jump at the retail business - driven by similar gains from both motoring and cycling - easily offset a small dip in turnover from its Autocentres.

The weather made life difficult for Halfords this time last year, so those weaker 2016 numbers made it easier to report impressive growth this time round. However, it was still a crucial period for the retailer and group like-for-like revenue year-to-date is now up 3.5%.

Investors will hope recent acquisitions will drive profitability - although there is little evidence currentlyManagement is clearly working hard to deliver its "Moving Up a Gear" strategy, but profits are at recent trough levels and sales growth is being eaten up by foreign exchange-related costs, instead of feeding into the bottom line. That's why management profit forecasts are unchanged, in line with consensus.

Reaching £81.5 million last year, Haitong's Tony Shiret has pencilled in £73 million of pre-tax profit for the 2017 financial year and £69 million for 2018. With hints that currency benefits take 18 months to unwind, the analyst has tipped profit forecasts for 2019 by 2% to £75 million as currencies check gross margin by 2019. These profit levels reflect earnings per share (EPS) forecasts of 29.4p, 28.1p and 30.8p respectively.

Strengthening its position in the motor and cycling markets, investors will hope recent acquisitions will drive profitability - although there is little evidence currently, Shiret warns.

Halfords has bought an £8 million stake in mobile tyre fitting business TyresOnTheDrive.com. The operating agreement will provide Halfords with the opportunity to trial the mobile delivery of its motoring services and generate synergies where possible.

With this new minority stake adding to its positions in the cycling markets though Tredz and Wheelies, the pool of attractive acquisition opportunities is drying up. So management want to return cash to shareholders and have scheduled a 10p special dividend for February, which is worth £20 million and on its own reflects a 2.6% yield.

Investec Securities reckons the group will pay out an ordinary dividend of 17.3p this year. Add that to the special and Halfords yields over 7%.

This one-off payout confirms that Halfords is confident it can keep the cash tap turned on and offset foreign exchange tailwinds in the future.

With better sales momentum and a meaty dividend, there have been broker upgrades in from the City. Haitong boosts fair value by 8% to 360p, while Investec reckons the shares are worth 380p, 10p more than previous guidance. Numis is the bear and has reduced its target price to 320p, a 10% discount to the sector.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.