The Week In Review: Jaded Wetherspoon could be worth a gamble


JD Wetherspoon

The City's analysts are near-unanimously negative on JD Wetherspoon shares. For 10 sell recommendations on the pubs chain, there is a lone positive tip.

Debt is high and interest cover low in this company, a hangover from its aggressive expansion to its current size of 650 pubs, which had to be halted for safety's sake when trading deteriorated. So Wetherspoon is only for investors willing to take risks.

But any moderation in the vicious trading environment will feed through to profits, and things appear to be stabilising. Like-for-like sales, down 1.7 per cent in August, were only 0.9 per cent lower. The new licensing laws will allow extended opening hours, a good opportunity.

The shares look pricey on 17 times existing forecasts. The lonely "buy" case is that the forecasts are too cautious. Have a punt.

KILN

After the devastation wrought by the US hurricanes, premiums for catastrophe reinsurance are expected to rise 23 per cent next year, and for oil rig insurance by 46 per cent. This is the time to be in insurance shares. Kiln - which we tipped at 86.5p in April - is a buy.

BBA

Conglomerate BBA is separating off its "non-woven materials" business, Fiberweb. That leaves the company to focus on its aviation work - it's good news, but the disposal will dilute earnings per share, dulling some of the benefit of the re-rating that more focus should bring. Take profits.

CSR

CSR designs the chips behind Bluetooth, the wireless technology. With a 56 per cent market share, the group produced a 151 per cent jump in third-quarter profits. The shares are cheap at 18 times earnings, though CSR got 60 per cent of its sales from just five customers in the past quarter. Speculative buy.

FRIENDS PROVIDENT

Friends Provident's strong position in group pensions makes it one of the best-placed insurers to capitalise on pension reforms next year. And though sales of protection policies have slowed, this should improve as the property market stabilises, because life and health insurance are often sold with mortgages. Buy.

CLINTON CARDS

The consumer slowdown has hit Clinton, but the card shop hopes that by Christmas, we will all have paid back enough debt to be able to splurge once more. However, Clinton's cards business is being poached by the supermarkets and its Birthdays acquisition now looks miscalculated. Sell.

LOK'N STORE

Lok'n Store, with 21 sites, is one of the top five players in warehouse storage, and looks a good opportunity. Not only is there much more growth to come, the business could fall prey to a bigger player. Buy.

CARPHONE WAREHOUSE

Carphone Warehouse organised phone contracts for 1.55 million people in the six months to 1 October, a one-fifth increase on last year, and is tipped to keep growing at this rate. Add in its own fixed-line telecoms network, which allows it to offer cheap broadband, and the shares look worth their full rating.

RENTOKIL INITIAL

Investors would be wrong to interpret Rentokil's latest trading update as the first shoots of a recovery. It will take longer to reap the rewards of long overdue investment in the business. Sell.

SHIRE PHARMA

Shire Pharmaceuticals, one of The Independent's tips of 2005, is up 28 per cent since the start of the year, having turned itself, in the City's eyes, from a one-trick pony to a stable of exciting new drug products. A large chunk of sales still come from one particular drug, but Shire should stay a bookies' favourite. Buy.

Demand for Rolls-Royce's aircraft engines is soaring

Rolls-Royce is a national champion, a UK giant that controls 40 per cent of the market for civil aircraft engines, and its management is in ebullient mood. Cost-cutting measures have paid off and demand for engines is now soaring again.

New super-size planes developed by Boeing and Airbus, both of which can take Rolls-Royce engines, are not the only reason for the upturn. The growth of airline travel in Asia, and of low-cost airlines in the West, are also boosting orders.

Best of all, planes are in the air more, which means vital servicing and maintenance work comes round more often, which is the most profitable work for Rolls-Royce.

The civil aircraft side has further to go; the power-generator and marine-engine businesses are ticking along nicely. Buy the shares.

The above are recommendations taken from the daily investment column.

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