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Sunday 14 July 1996
Like many conglomerates, Carlton has grown extremely quickly to reach its current status as a FT-SE 100 stock and stock market darling. Mr Smith, however, pinpoints a number of weaknesses. His main concern is the practice at Carlton of writing off goodwill - some pounds 1.5bn by 1995, with pounds 1bn of that split almost evenly between Technicolor and UEI. However, writing off this amount of goodwill immediately inflates the return on equity. It would seem that in 1995 Carlton seemed to have generated a spectacular 40 per cent-plus return on equity. But add back the written-off goodwill, and the return is a more pedestrian 8 per cent. Of course, Mr Smith's recommendation applies to all acquisitive companies. You have been warned.
REDLAND, the building materials group, has been restructuring for so long that shareholders may be forgiven for thinking this has become the norm. Nevertheless, a detailed comparison of the company to its peers by stockbroker Salomon Brothers shows that, on most counts, Redland stands at too deep a discount to its peers. Restructuring has also been the norm at Pilkington, influencing return on equity year in, year out. But there, and at Blue Circle, the shares would appear overvalued - the market is fully expecting Pilk's efforts to pay off, whereas Redland remains unloved. The shares, at 411p, offer value on a long-term view.
WHAT to do about Eurotherm? The loss of Claes Holtman as chief executive in a boardroom bust-up has left the shares sagging and institutional shareholders are disgruntled. Meanwhile, management has reverted to finance director Robert Biddle and chairman Jack Leonard, who saw profits fall to pounds 7m in the Eighties through overexpansion and a misjudged strategy. However, Eurotherm has appointed a new chief operating officer, Peter Wade, who has gone down well in the City. And even if Mr Holtman is not restored, it is unlikely the company will tinker with the present strategy. The shares, now at 534p, and off from 644p, must represent good value.
QUALITY CARE HOMES, the nursing homes operator, deflected some concerns about the sector in its recent interims. Operating margins, at 28 per cent, show there is still plenty to go for in the business. At 316p, the shares are on a lowly multiple of 9.9 times 1996 prospective earnings. Cheap.
GREENALLS, the pubs-to-hotels group, is around its year low, relative to the market. The only justification for the fall would seem to be its ejection from the FT-SE 100 index, as privatisation issues elbowed it to one side. The acquisition of Boddingtons last year gives it further scope, including developing its wholesale drinks business. It took its estate to more than 2,300 pubs and restaurants, making it the largest independent pub retailer in the UK. Even so, the shares are cheaper than Bass, Whitbread, and Scottish & Newcastle. Buy.
THE independent oil and gas exploration and production sector has enjoyed a strong run over the past year and a half. Much of this was down to the market ignoring the true potential of some of the finds registered by the companies. However, as the market has cottoned on to the possibilities, there looks to be less upside left to go for. Even so, a couple of stocks stand out: Premier Oil (29p), where recent comments from Thailand's state- owned oil company PTT suggest a signing of a gas sales contract is imminent. Alternatively, there is Tullow (92p), which is adding to its published reserves at a rapid rate.
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