Today I thought I would briefly cover what may be a contrarian value opportunity or may be I'm off my trolley and it is a value trap? Any way I'll present a few bull and bear bullet points and let you decide for yourself.
Any way as ever you pay your money and take your choice. As I have had no Food retail exposure to speak of since selling out of JS and Tesco before all the recent turmoil I have decided to take a small stake in this one as it seems to offer value and has managed the decline quite well. I'm sure I may live to regret that as it is going against my own Scoring system although I note it does Score 93 on the Stockopedia Stock Ranks.
The final prompt for me to get involved again was that this should be a relatively defensive sector if we are heading for a recession, although they have just gone more heavily into general retail with the Argos acquisition. Plus I like the look of the long term chart and possible support in the low 200's (see chart at the end).
So there you go, as ever time will tell and you pay your money and take your choice or not as the case may be.
One of my readers was bemoaning the fact that they couldn't find any bargain in the market despite the recent set back. So I did a bit of digging around and found some cheap looking small retailers that I have come across, although I stress I am just pointing them out - not recommending them - so you should do your own research if they interest you.
Now this is topical because after a soggy August in the UK the BRC are suggesting that retail sales slowed to crawl as a result with clothing retailers expected to be hit the most. However the report from Reuters does suggest this may have been a blip due to the late August Bank holiday which meant that back to school spend and summer furniture sales were not included.
Any way with that background I thought I would start by highlighting a furniture retailer which came back to the market earlier this year having gone bust previously. If that doesn't immediately put you off the stock concerned is SCS. Now they rather blotted their copy book or stained their sofa as it were when they warned about a General Election slowdown just after they floated. This caused the shares to fall below the issue price and as you can see in the chart below to be offered at up to 40% off their recent highs like one of their regular sales in store.
While you can't buy the shares on interest free credit, the interesting thing is that is seems to have been building a base around the 140p level and since then they have updated on trading over the remainder of the current year to the end of July. In this they confirmed that they trading in line with the down graded forecasts and were committed to paying out a big dividend. Thus if forecasts of a full year dividend of 14 pence are correct, this suggests they should pay a final dividend of 11.2 pence as they paid an interim of 2.8 pence back in May. Thus at a price of around 160p they would be yielding 7% on the final alone and a whopping soar away 8.9% if they maintain the dividend next year too. If they manage to hit next years earnings forecasts too then it may be on less than 12x, but obviously no guarantees with this one.
So obviously not a quality play and they earn pretty thin margins and slipped up just after floating, but could be an interesting high risk play on a pick up in consumer spending on the back of increasing real earnings and falling petrol and heating costs. I also note the gap on the chart at just under 220p which often get filled so this could be a medium term target perhaps if they can get back on track. There was also a good write up by Edmund Shing here on Stockopedia earlier in the year if you want to read more about it.
Now if that is not down market enough for you then you could always slip down the high street and treat yourself to some cheap shoes from Shoe Zone (SHOE). This is another cheap retailer that came to the market not that long ago and has also had a profits warning and price collapse more recently. In their case rather than blaming the election they trotted out ye olde weather excuse and apparently the wrong type of ladies boots (ankle) being favoured, although with less imitation leather I thought they would have been higher margin than knee boots?
So on the chart it is a similar picture to SCS with a gap this time at just under 260p versus the current 170p or so price. At this price it trades on maybe just under 10x with a forecast yield of 5.5% or so. I say maybe because it is an October year end and we have just had a poor August, weather wise in the UK, so I guess they could be vulnerable to another profits warning perhaps on the back of that as they blamed the weather for the last one. So on that basis as I'm not that keen on their stores or their shoes I'm not sure I can get that excited about the share either, despite the apparent value. But again their was a more bullish write up on this one on Stockopedia recently if you wanted to get more detail on it.
Finally if Sofa's and shoes are not your cup of tea then everyone's got to eat and drink right? So despite this the food retailers have been going through the wringer in recent years as competition from the German discounters Aldi and Lidl has "Mullered" them. Thus the only part of the sector which has been growing has been their high street or convenience type shops which, apart from Morrisons who were too late to the party, have been a reasonable success for the majors.
Now the main casualties of this dual pronged expansion of smaller store by the Germans and the major UK food retailers has probably been your typical high street / corner shop / convenience store which doesn't have the range or the buying power to compete. However there is one chain of these that has been expanding by buying up failing community Newsagent shops (CTN's). This one is McColls (MCLS), another recently listed retail group with a share price chart that has, perhaps unsurprisingly, been heading in the wrong direction too.
So there is a bit of a pattern emerging here, recent new issues not having done so well, which is one reason why I don't generally participate in new issues unless they are being priced to go. This is because they are usually coming to the market because the owner / managers think it is a good time to sell. This one has therefore, without a profits warning as far as I can tell, drifted down to about 10x with a 6.5% yield which may be about right / fairly full for the limited growth that is now being forecast.
Of the three I can just about see the case for this one where they are buying up small failing stores and improving them by rebranding and offering more in the way of groceries and alcohol. They also seem to be favouring neighbourhood or community stores as far as I can tell which I guess benefit from the localised monopoly and laziness or inability of their clientele to go to a supermarket perhaps 5 minutes down the road maybe? Again if you want to read about it in more detail there was a good article in the Midas column in the Daily Mail recently.
*Beware they may be cheap for a reason and because of that I cannot recommend a purchase, but as I always say you pay your money and take your choice. Talking of which on a related matter see this classic video below and read all about it if you are too young to know the story or are not familiar with it.
No not General Election policies but Company results in brief. First fags represented by Imperial Tobacco (IMT) which has announced interim results to 31 March 2015. The highlight for me is the delivery of the promised 10% dividend growth which is the main attraction of this one in addition to the current yield of 4.5% from this years expected dividend of 140.5p.
Otherwise it does not score so well on cover, operational quality (margins and ROCE) or estimate revisions.
Pensions come from Legal & General (LGEN) plus funds, annuities and other savings and other financial products. They saw continued strong growth and in contrast to Aberdeen yesterday, strong in flows to their asset management division. I continue to like this one and it has come back by around 10% from recent peaks and therefore now offers an expected dividend yield of just over 5% based on the forecast dividend for the year of 13.1p which represents growth of 16%.
On the food front we have had poor results, as expected, from Sainsbury's (SBRY) which included a slightly smaller than forecast reduction of 23.7% in the dividend based on their 2x cover policy. On this basis a further reduction in the dividend is therefore expected for next year too. On this basis and given the on going dividend cuts and the competitive nature of the industry with the main players being squeezed by the discounters, I continue to steer clear of this sector.
Finally on the food front I mention in passing Finsbury Foods (FIF) the AIM listed £100m market cap firm which is evolving into one of the largest speciality bakery groups in the UK. It is also one of the stocks that made it into the Mechanical CIS Portfolio which launched recently. They seem to be on a roll at the moment with their latest acquisition to follow on from the Fletchers acquisition they did late last year. The latest one is something called Just Desserts which they have bought from the receivers which sounds like a good idea, although may be concerning that it went bust in the first place?
Any way they say this is part of the escalation of Finsbury's entry into the food service cake channel and in particular the high growth national coffee shop segment. This is in line with their channel diversification strategy, indicated at the recent acquisition of Fletcher's in 2014. So it seems like a sensible add on which also brings some more diversification by product and customer and helps to reduce their dependence on the main food retailers a little.
The shares appear to offer value with a sub 10x PE and a well covered yield of just over 3%, however they don't seem to be the highest quality business in the world operationally. I note also that they only recently reintroduced dividends, although they have been and are forecast to grow rapidly. In addition they have had a poor recent earnings revision trend which is something else I do not like to see and this has brought the score down on this one recently from top decile to 69 currently. So a bit of a mixed bag and it will be interesting to see if this latest acquisition can turn the estimate revisions around but it is hard to tell because they provide little in the way of financial detail on the deal.
Finally as we look forward (?) to the election and all the hours of TV coverage do look out for Charlie Brooker's Election Wipe tonight and Paxman on Channel 4 with David Mitchell the comedian for an alternative take on it on election night.
if you are really bored, as I touched on Finsbury Foods today you could always check out the new series on the BBC called Inside the Factory: How Our Favourite Foods Are Made in which they looked at appropriately Bread last night and with Chocolate featuring tonight.
...or cinemas, computers, convenience stores & CCR. The cinemas part is the final result from Cineworld (CINE) which look very good and in fact the adjusted eps of 24.4p was close to the 25.8p forecast for 2015 and the bumper dividend of 13.5p (+33%) was ahead of the 13.1p forecast for the year to 2015. With the shares up by about 4% to 465p this morning, this leaves them on a fullish looking historic 19x PE with a reasonable 2.9% yield.
The shares had a good run prior to these numbers but they seem well placed with a strong film release schedule for this year, benefits from the merger with Cinema City the Israeli and eastern European cinema chain being upgraded to £5m from £2m and with 20 new cinemas (about 10%) planned.
Thus while they have done well and look a bit expensive now, with consumer confidence and incomes improving, the prospects looking good and upgrades likely they seem like they should be well supported or could still show some further momentum to the upside. Late morning update I see that Numis have upgraded to £90m Pre Tax for this year which I estimate would translate to around 27p of earnings for a 17.5x P/E @ the now 473p price.
The second C today came from Computacenter (CCC) the independent provider of IT infrastructure and services that enables users which reported final results today. These are somewhat difficult to interpret due to the recent return of capital and resulting share consolidation. Thus the numbers which are adjusted for this don't seem to square with the forecasts, which presumably were not adjusted. Nevertheless there seems to be underlying progress here in the UK and Germany but continued losses in France on the back of poor older contracts and they say a return to profit here is still some way off and it has led to a write off.
These shares have also risen recently ahead of and post the return of capital and as a result they have enjoyed something of a re-rating. So taking the reported adjusted numbers of 46.8p eps and 19.8p dividend (although confusingly they also mention 19p in the headlines) this leaves them on a fair looking historic PE rating of 15.4x and a yield of 2.75%, although with the overall operating margins being up to 2.77% the earnings yield comes in at a decent looking 10%.
On balance it seems like a well managed group with a shareholder friendly management, although the operations in Germany and France continue to struggle, they seem confident of making further progress this year. As such I can't honestly say you should rush out and buy it here as I suspect forecasts may reset downwards as the confusion surrounding the consolidation clears, but it would seem like a solid hold as part of a diversified income portfolio.
The final C is C-Stores or convenience stores as mentioned in Morrison's (MRW) final results today. They have taken a write off and are closing some of these which seems bizarre given they were charging into this last year as they played catch up, obviously they were not discerning enough about the sites they were buying. Apart from that the headline numbers all seem to be reasonably in line with the guidance they set out about a year ago, which is quite an achievement given the industry background.
This saw a big drop in profits as they invested in lowering their prices and it seem this will be on going when the new Chief executive joins next week. It also means, unsurprisingly that they are also cutting the dividend from this years promised 13.65p to a minimum of 5p for next year for a 2.4% yield. So on that basis and given the on going price war etc, in the industry I'm not tempted to buy this one here, although I could see that some might want to buy it as a recovery / new management turnaround play or maybe there's a bad moon rising so here some CCR for you?
Company news flow finally seems to be picking up with a couple of names I have covered in the past reporting updates today. The first of these is the house builder Persimmon (PSN) which unsurprisingly, given the strength in the housing market and the resultant price inflation, reported a strong trading update.
The average selling price for the Group in 2014 was c. £190,500, an increase of 5% over 2013 (£180,941). Full year revenues increased 23% over the prior year to £2.6bn (2013: £2.1bn). This revenue figure looks to be about 1.5% ahead of consensus forecasts (Source:Reuters / Stockopedia). They also remain confident of a further improvement in operating margins for the second half of the year which will underpin significant growth in pre-tax profits and excellent cash generation for the year ended 31 December 2014.
This suggests to me that they could slightly exceed current earnings estimates and perhaps report around 120 pence of earnings which together with the forecast dividend of 78.3 pence would leave them on 12.8x and a yield of 5% based on a price of 1537 pence this morning. They also have cash on the balance sheet of £378 million (around 8% of the market cap.) a strong forward order book and they have been able to add to their land bank.
So all in all seems reasonable, but I suspect the housing market may soften a little in the first half of 2015 given the strength last year and perhaps some uncertainty with the election coming up. But with the on going help from the government and the need for more houses to be built they still seem well placed to grow in the medium term with a likely tail wind of further modest house price inflation to help so I'm happy to hold on to this one for now, although I did top slice some Bellway at the end of last year.
Meanwhile today we have had the first of the food retailers, Sainsbury's (SBRY) with an update on their Q3 and Christmas trading. Here as we all know we are seeing the effects of price deflation which is leading to them seeing falling sales with:
So I will be steering clear of this one having sold it last year when Justin King stepped down as i think the price deflation and margin squeeze they are facing continues to be a toxic mix. Added to which they look like they will be cutting their dividend for the next two years which is never good in my book, but more on that another day.
Summary & Conclusion
I titled this piece inflation versus deflation and here you have an example of the effects of these forces on two businesses and this is why I currently favour Persimmon over Sainsbury's plus the opposing trends in their likely dividend payments, although Persimmon's is somewhat complicated by their capital return programme. But it does emphasis the importance of looking at trends in turnover and margins among other things when researching a company as per my check list. Plus see the chart below for what it has meant for the shares.