The Week in Review: BT between a rock and hard place

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BT is caught between a rock and a hard place. Many analysts accuse it of having become a boring utility with few real growth prospects, yet urge the company not to do anything too radical, like a big acquisition, that might make it a riskier investment proposition.

BT is caught between a rock and a hard place. Many analysts accuse it of having become a boring utility with few real growth prospects, yet urge the company not to do anything too radical, like a big acquisition, that might make it a riskier investment proposition.

They are right to be concerned about growth. BT has already had to abandon the revenue targets it set, only six months after announcing them. The company is facing increasing competition in the domestic fixed-line telecoms from new entrants such as Carphone Warehouse and supermarkets, while consumers are using mobile phones more.

If you believe Ben Verwaayen, chief executive, the company can get decent organic growth from broadband and other offerings. But the financial picture is clouded by a pension fund shortfall. That could see BT have to pay top-up payments of several hundred million pounds a year. Until this issue is out of the way, the current share price seems fair.

British American Tobacco

As the only UK cigarette maker with operations in the US, British American Tobacco is the only tobacco stock with exposure to the potentially deadly outbreak of litigationitus that has left industry giants coughing. BAT is also the only UK tobacco group to have suffered from price competition in the US. But BAT's long-term prospects are healthy, and the shares yield 7 per cent. Buy.

Irish Life & Permanent

Compared with rivals in the UK and on the Continent, Ireland's largest life insurer and mortgage provider has been seen in some corners as a relative safe haven, thanks to its strong capital base and dividend cover. After the company's purchase of a bank, Irish Permanent, in 2001, mortgages have been particularly strong thanks to Ireland's booming housing market. A long-term buy.


Sir Martin Sorrell has been the doctor doom of the media industry for a long time. But the man who came up with the "bath-shaped" advertising recession, now says there is "definitely more stability" in the market. Sir Martin stuck with his forecast that things won't pick up until next year, when the US presidential elections and the Olympic games should mean that ad spend increases. His shares will gain further as more evidence of recovery emerges. Buy.

SSL International

In the short-term, SSL might struggle to achieve a full price from the sale of its hospital gloves and scrubs business. In the long-term, it will be left only with low-margin, low-growth condoms and foot care businesses. A medium-term pick-up is dependent on the success of a mission to cut costs from the flabby European distribution network. Until there are signs of a breakthrough, avoid.


Britain's largest carpet retailer has a solid business with a market-leading position and a well-covered dividend. But the signs are that this is a mature business whose core UK operations have lost a bit of momentum while the higher growth continental European operation struggles to make the headway hoped for. After a strong run it could be worth taking profits.

McCarthy & Stone

McCarthy & Stone is one of those companies on the right side of Britain's demographic timebomb. It is the biggest builder of retirement flats and other sheltered housing, with 65 per cent of the market. The company anticipates some softening of the housing market, however, and notes "build cost pressures", particularly wages and increased regulation such as the aggregates tax and landfill duties. Take profits.


Where David Thomas, the chief executive, saw growth potential from leisure brands with broad consumer appeal, the City saw a hotch-potch of unappetising concepts. Until recently. Fans now applaud Travel Inn, the outperforming budget chain, and the David Lloyd Leisure health clubs, although others think David Lloyd could find it tough to find the right suburban sites for its expansion. After a strong run, the shares are fully valued. Hold for the 4 per cent dividend yield.

Body Shop International

Body Shop has not been the most fragrant investment over the years, what with over-expansion and poor retail disciplines in stores. It is at last moving in the right direction. Product innovation is starting to have an impact, and the restructuring should be complete by the end of the year. An interesting recovery play.


The cash-strapped biotech Vernalis has wrapped up a £14m fundraising but it is not worth shareholders taking part in the seven-for-10 share offer. The company will still lead a hand to mouth existence. Royalties from Frova, its migraine pill, might cover the cost of developing other drugs, but the company is sub-scale. With biotech drugs more likely to fail their trials than pass them, a company with this meagre a pipeline is unattractive in the extreme.


The fear is that Cattles' has suffered unfortunate timing in having moved away from door-to-door lending to those who absolutely need to take on a bit of credit for one-off purchases. Increasingly, it has found itself financing the luxuries of just the sort of people who have a bit of slack in their belts that they can tighten in the current economic downturn. Avoid.

Carlton Communications-Granada

The bounce back by shares in Carlton Communications and Granada, the ITV companies, might be over. The Competition Commission may only allow their merger if both sell their sales houses – so it may not be worth doing the deal. Granada has a sizeable production house, so programme-making provides it with another income stream. Carlton is dependent on ITV advertising revenues, which have been growing only weakly. Both shares are unattractive for now.

The above is a selection of recommendations from this week's daily investment columns

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