The Week In Review: Driving profits on the forecourt is a cut-throat business

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Slowing UK car sales might be enough to put most people off the idea of investing in a new and second-hand motor dealer this Christmas.

Slowing UK car sales might be enough to put most people off the idea of investing in a new and second-hand motor dealer this Christmas. But changes in the car sector's competition rules are proving to be a strong driver of growth for the larger dealers, such as Reg Vardy, making their shares an increasingly compelling proposition for the private investor.

As the sector's exemption from EU competition rules was finally scrapped last year, an abundance of acquisition opportunities for companies with cash to spare, such as Vardy, were created. Under the old rules, manufacturers had all the power, putting limits on how many dealerships a company could own, and dictating where they could operate. But with these draconian laws finally consigned to the pits, dealers were suddenly empowered, and now they are free to buy as many dealerships as they can.

Over the past 15 months, Vardy has been doing just that, snapping up 28 smaller rivals. Although many of these are still loss-making, once they have been integrated into the Vardy system, they look set to make a substantial contribution to profits. Meanwhile, Vardy continues its shopping spree.

With a dividend yield of more than 3.5 per cent and a share price that is the lowest in the sector, Vardy is definitely one for this year's Christmas stocking. Buy.


The quarries group, which supplies more than 80 million tonnes of stone, asphalt and other materials to the construction industry every year, is among the companies anxiously watching the exchange rate. With the US currency sliding, UK shareholders are missing out on many of the benefits of AI's recent strategy of acquisitions in North America. The current share price, with a dividend of just over 3 per cent, represents is appropriate for AI's modest long-term growth story.


Shares have nearly doubled in the past 18 months, reflecting a sparkling trading performance by the carpet retail chain. Much of the sales gain has come from store openings and concessions at Allders and Debenhams. The big question is how far Carpetright can escape the impact of a slowing housing market, as many sales happen when a family moves house. Lord Harris, chairman, admits that the UK floor covering market is "slightly difficult", but says that 85 per cent of his sales are replacement. Existing investors may find it worth sticking around for the full-year results in the spring, but it is looking a bit late for newcomers to climb aboard.


Hanson is the world's largest producer of crushed rock, sand and gravel. With £3bn of sales a year, and underlying profits of more than £300m, it is an investment opportunity to be taken very seriously. Notwith- standing the ebb and flow of the economies in which it operates - North America, plus the UK and Australia - it is leader in a vital industry whose operations generate vast amounts of cash. Asbestosis litigation payouts continue to dog the group but longer-term, the strategy of bolt-on acquisitions will guarantee earnings growth above economic growth. A dividend yield of 4.5 per cent ought to allow investors to sleep nights.


Previously called 365 Corporation, this has always ploughed money from its cash cow, premium rate chatlines, into new projects, and now is investing in speech recognition technology. It has sold this to cinemas, utilities and mobile phone companies to improve the way calls from the public are dealt with. But there was a profits warning this week, because the profitability of its voting lines (for the likes of The X Factor and I'm a Celebrity...) has fallen sharply. Its markets are tough and getting tougher, and the company needs to cut more costs. Avoid.


The newspaper and magazine distributor has branched out into baggage handling. The drivers behind its recent success include a turnaround in newspaper sales - sparked by papers such as The Independent changing to a compact format and raising cover prices - and an increase in magazine sales due to the recent explosion in men's lifestyle titles. Meanwhile, its aviation business continues to gain momentum. Menzies shares are still a buy.


Outsourcing the making of toys, clothes and electronic goods to the Far East has lowered production costs for many companies, but multinational global brands don't want the quality of their goods to slip in the process. That's where Intertek comes in. Its Labtest division in Asia puts new toys and clothes through stress tests to make sure the colours don't run, buttons don't fall off and the toys that children are playing with this Christmas don't appear on the BBC's Watchdog condemned as a "potential death trap". The company is dependent on buoyant consumer spending in the Western world, which is wobbling, and the shares look too expensive. Leave on the shelf for now.


Alliance UniChem shares have surged 36 per cent since we advised readers to buy back in February. The star division is the retail business - that is, the community pharmacies it runs in the UK (where it owns the Moss chain), Norway, the Netherlands, Italy and Switzerland. Governments across Europe have been encouraging the local chemist to do more than simply dispense drugs, suggesting they dispense advice as well. It is a trend that will only continue, given the desire to reduce healthcare budgets and unclog doctors' surgeries. Still a buy for the long term.


Regent owns 66 Walkabout and Jongleurs venues but an over-ambitious expansion plan took it to the brink of breaching its banking agreements. After the ousting of the chief executive and finance director, the discovery of accounting mistakes proved it had, in fact, breached them. The banks could have pulled the plug. Instead, we have a new management team, led by Bob Ivell, formerly head of Scottish & Newcastle's old pubs division. But the biggest change of all is the reversal of two years of falling sales, thanks to a pub-by-pub review of drinks prices which has allowed it to raise the costs to its customers in some areas. Buy.

Lloyds won't play Scrooge

If you have a little cash to invest, you could deposit it with Lloyds TSB and get an interest rate of about 5 per cent. Or you could buy some Lloyds TSB shares and pocket a dividend of almost 8 per cent.

That dividend is the best in the banking sector. At the height of worries over the solvency of the life insurance industry, in which the Lloyds TSB subsidiary Scottish Widows is a significant player, the payout had looked like it might not be sustainable. But that fear has subsided somewhat as equity markets have recovered. Additionally, Lloyds' chief execu- tive Eric Daniels has shown himself willing to raise capital from the disposal of international operations rather than by playing Scrooge with the divi.

The pressure to find extra capital to fund customer growth ought to ease now in any case, since the slowing housing market will almost certainly mean fewer mortgages being written. That will free up cash to support the recovery of Scottish Widows, which ought to benefit from consumers' need to start saving again, and from reforms of the way life insurance products are sold.

The dividend is certainly the main attraction of Lloyds shares, and some would say it is the only one. Lloyds is not alone in trying to flog more financial products to its customers, and with lending growth constrained, competition will surely hurt profitability. The same is true in business banking, where Lloyds has traditionally been weak. Yet costs are well under control and provisions for debt defaults are still benign. Buy.

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