Investment Column: Carpetright has gone far enough

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The Independent Online

Carpetright shares powered up another 51p to a year's high of £11.40 yesterday in the wake of another set of sparkling figures from Lord Harris's carpet retail chain. But after a near-doubling in the past 18 months the time for investors may be fast approaching to take profits or perhaps even bail out of the stock altogether.

Carpetright shares powered up another 51p to a year's high of £11.40 yesterday in the wake of another set of sparkling figures from Lord Harris's carpet retail chain. But after a near-doubling in the past 18 months the time for investors may be fast approaching to take profits or perhaps even bail out of the stock altogether.

The company's underlying pre-tax profits were up 16.5 per cent to £32.6m in the half-year to the end of October, on the back of sales 9.6 per cent up at £235.9m. The interim dividend rose 2p to 19p, an 11.8 per cent gain, and Lord Harris has indicated a similar rise is on the cards for investors for the full year.

Much of the sales gain has come from store openings and concessions at Allders and Debenhams department stores. Like-for-like sales rose just 3 per cent in the UK as a group, and rose at the same rate in the department stores. But margins are increasing because the group now claims to be the world's biggest carpet buyer, yet stocks have fallen by £2m to £32m.

The big question is how far Carpetright can escape the impact of a slowing housing market, as many furnishing sales happen when a family moves house. Lord Harris, who eschews corporate political correctness to be both chairman and chief executive, admits that the UK floor covering market is "slightly difficult", but points out that 85 per cent of his sales are replacement rather than for new homes.

But carpet replacements can be easily postponed and Gordon Brown said in his recent pre-Budget report that consumer spending is likely to be squeezed by business investment. Carpetright expects to pick up between £7m and £15m of sales from the collapse of its rival Courts, and is looking to snap up some stock. It is not, however, interested in taking on Courts' stores.

The group's stores in the Republic of Ireland and Benelux are doing well, which is encouraging Lord Harris to look around for expansion opportunities in Scandinavia and Poland. These may help to offset any slowdown in the UK, but the group will find it harder to keep pedalling at its recent pace.

With a prospective price-earnings ratio of 15.3 and a yield of 4.25 per cent, 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.

Product tester Intertek is one to steer clear of

Outsourcing the manufacture 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, the buttons don't fall off and the toys children are playing with this Christmas don't appear on the BBC's Watchdog condemned as a "lethal death trap".

Intertek said yesterday it expects its operating profits for the full year to hit forecasts, despite 80 per cent of its earnings being dollar-related. Asian opportunities continue to expand and Intertek also said its pharmaceutical, oil and gas testing division had performed strongly. Margins here are much lower than in Labtest, but Intertek is building an outsourcing division to take on laboratory work normally done in-house by oil and gas companies. This should provide a higher margin.

The company is to an extent dependent on buoyant consumer spending in the Western world, which has had its wobbles of late. The shares have had a good run recently as the potential of the testing market gathers interest. Now trading at 17 times 2005 earnings, Intertek is bound to be a solid performer but looks too expensive. Leave on the shelf for now.

Soaraway John Menzies looks good on paper

John Menzies shares hit 500p for the first time in more than six years yesterday, as the group issued yet another bullish trading statement and persuaded analysts to upgrade their profits forecasts for 2005. The last time Menzies shares were anywhere close to 500p, in October 1998, a significant amount of the company's revenues were still accounted for by its newsagent chain. But after selling off its outlets to concentrate on newspaper and magazine wholesale distribution five years ago, and branching out into baggage handling, today's John Menzies is an entirely different beast.

The drivers behind the company's most recent success include a turnaround in newspaper sales - sparked by the move of papers such as The Independent to change to a tabloid format - and an increase in magazine sales due to the recent explosion in men's lifestyle titles. Meanwhile, its aviation business continues to gain momentum in its bid to pick up new contracts, and is making an increasingly large contribution to group earnings.

Shares have almost doubled since we recommended investors to buy this stock 21 months ago, and while growth is certainly slowing, there looks to be further upside to come. With a reasonable dividend yield of more than 3.5 per cent, investors could well see a double-digit total return next year. For those that don't own some already, Menzies shares are still a buy.

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