Department store group looks an unattractive buy

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The Independent Online

Therefore, in December it sold its Hellermann Tyton plastics division, which manufactured clips and fasteners for a diverse number of industries, for £289m, and promised to reinvest the bulk of the cash in a dash for growth. Yesterday came Spirent's first acquisition to this end. The group, which trades at 18 times earnings, paid £40m for SwissQual, a Swiss-based company which tests and measures wireless telecom kit, in a deal that valued it at 13 times earnings.

There are likely to be further such acquisitions in the future as Spirent sees itself as a consolidator. And judging by yesterday's purchase, Spirent is not the type of company that will overpay. However, the group does seem to have decided to place all its eggs in one basket. Although the telecoms testing and quality assurance market is enjoying strong growth, such buoyant trading conditions will not last for ever, and when that comes Spirent faces earnings meltdown.

In this respect the group's strategy is reminiscent of the path taken by Marconi in the late 1990s, when it shed its conglomerate structure and bet all on a niche telecoms equipment operation. As is well known, the gamble ended in disaster after a severe industry downturn, and by 2004 its shareholders had lost virtually everything.

Anders Gustafsson, Spirent's chief executive, promises that his company will not suffer such a fate. He points out that unlike Marconi, Spirent is not borrowing any money to fund its expansion, but is merely reinvesting the cash it has in the bank. As long as this remains the company's guiding principle, a Marconi-type scenario should be avoided when the downturn comes.

In the meantime, Spirent shares are likely to perform strongly. They trade at a discount to rivals and this will start to narrow in the coming months as the group secures orders for next-generation equipment and tells the City about them. But investors are warned not to get too greedy, for any slowdown in the telecoms industry will hit Spirent particularly hard this time around.

It is rare to hear a company tell the City that its profits have been "unacceptably low". But Mike Killingley, chairman of the department store group Beale, did just that yesterday as the retailer unveiled a full-year pre-tax profit of just £222,000. In fact if it had not been for a series of disposals, Beale would have registered a loss for the year.

Given this performance, it was no surprise to see the company cut its dividend to 2.2p a share from last year's 3.3p.

In its present state, Beale, which has 11 department stores in towns ranging from Bolton and Kendal to Winchester and Worthing, is not an attractive investment proposition. Although the group registered a 7 per cent rise in like-for-like sales during the 11 weeks to 14 January its margins are in decline. Meanwhile, the company is burdened by a £6.9m pension fund deficit, and brokers are forecasting only a very modest profit from the group in the current year.

The broker Seymour Pierce is expecting it to notch up a £200,000 pre-tax profit by the end of 2006, which leaves Beale shares trading at a hefty 90 times earnings. Hope that the retailer could be taken over is the only reason its stock enjoys such a rating, but Seymour Pierce is sceptical about such an outcome.

Beale is believed to have held bid talks with House of Fraser at the start of last year. However these came to nothing, and a rerun of the negotiations ending with a deal looks unlikely after yesterday's results from the group.

Investors would do well to sell Beale stock at current levels.

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