The Investment Column: Dollar slide takes shine off Signet

Fast food backlash threatens to freeze out Enodis - Don't take profits yet, United Drug has more upside
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Signet Group is the jewellery company behind the Ernest Jones and H Samuel chains across the UK, but the main focus of its operations is across the Atlantic, where it owns 1,141 stores under the Kay Jewelers and Jared the Galleria of Jewelry fascias. About 70 per cent of group turnover comes from the US and that proportion is only going to grow, since there is not enough business in the UK for any more store expansion.

Signet Group is the jewellery company behind the Ernest Jones and H Samuel chains across the UK, but the main focus of its operations is across the Atlantic, where it owns 1,141 stores under the Kay Jewelers and Jared the Galleria of Jewelry fascias. About 70 per cent of group turnover comes from the US and that proportion is only going to grow, since there is not enough business in the UK for any more store expansion.

Which is why the slide in the dollar has been such a pain for Signet shares. The managers of the US business grew operating profits by 26.5 per cent in the three months to October, in dollar terms. In sterling terms, the profit growth from the US was a much more modest 12.5 per cent. It is nigh on impossible to imagine the dollar rebounding soon, and the state of the US finances suggests it could have much further to fall.

Signet was pointing to a silver lining yesterday. Gold and diamonds - its most significant raw materials costs - are traded on commodities markets in dollars, so the UK business has been able to buy relatively more and the profit margin Ernest Jones and H Samuel can make has expanded as a result. But in the bigger US business there is no currency insulation and Signet has not been able to pass on the full extra costs for fear of losing customers in a highly competitive market.

One further reason to be fearful is the state of consumer confidence in the UK. Already Signet is warning that sales growth has slowed sharply, particularly in what it calls "the upper sector of the mass market". It could be a tough Christmas in the UK, as gift buyers keep more of an eye on their credit card balances than before. Two-thirds of Signet's profit is made at Christmas.

All of which should deter people from buying the shares for a while. Earlier this year we said buy, but the stock has not performed and the outlook in several respects looks much more cloudy. This company could double its selling space in the US over the next decade, and some shareholders will want to stay in for the very long term. But it is hard to escape the conclusion that the stock is going down, not up next year.

Fast food backlash threatens to freeze out Enodis

Decidedly unhealthy figures at Krispy Kreme - and we're not talking about their customers. The US doughnut chain's results yesterday showed just how quickly consumers are rejecting deep-fried fast food. Enodis, which makes industrial cookers and refrigerators for the fast food industry, and which counts Krispy Kreme among its customers, is therefore in a precarious position.

Long-term shareholders of Enodis had reason to cheer its own results yesterday, which showed further evidence of recovery from the dark days of 2003. Enodis's profit rose a better-than-expected 6 per cent in the year to September, stripping out exceptional gains.

The 35 per cent reduction in net debt is excellent, particularly if US interest rates rise substantially, and allows the company to reinstate the dividend. It has also been able to invest heavily in new product development for its European businesses, whose performance had an adverse impact on yesterday's figures, but where it should reap rewards after 2005.

The fast food industry, most of which buys equipment from Enodis, has been investing recently, this time in chilled foods and non-frying accelerated cooking technology. The trouble is this remains small fry for Enodis compared with the old-style grease machines.

Enodis is certainly trying to see the opportunity rather than the cost in changes in attitudes towards the fast food industry, but investors ought to be wary. Enough reasons to resist selling the stock but probably not enough to buy any more of them. Hold.

Don't take profits yet, United Drug has more upside

United Drug is a wholesaler of medicines to pharmacies in Ireland, and a contract distributor for the pharmaceuticals industry as well. As that nation's drugs bill, like the UK's, has soared in recent years, United has done very well indeed.

United has a track record of growing profits and dividends for each of its 19 years on the stock market. It has also made successful play of its independence, since it doesn't own pharmacies, unlike many of its bigger rivals. That has attracted independent pharmacists to become customers.

The Irish government controls drug prices, which are up for review next summer. It could well follow the UK in imposing a cut, and United would share the pain with the drug makers. However, as United showed yesterday (when it admitted delays to a new distribution centre in the UK), the company's strong growth is little compromised by the odd setback.

And it is expanding into areas where the regulator cannot reach and where margins are fatter. It is doing more work for the pharmaceuticals industry, which is increasingly outsourcing its marketing to external salesforces. And it is moving into the distribution of medical devices and lab technology.

Although the share price graph opposite shows the temptation to take profits, and the stock looks a touch expensive at 237p, there is little on the horizon to worry about. Hold.

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