The Investment Column: Halfords survives storm clouds to see bright future

Aveva; Ted Baker
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The Independent Online

Current price: 370p

Our view: Hold

Retailers were drenched by the watery summer, and those selling equipment for outside activities were especially expected to suffer. Halfords has bucked the trend, with the very division that was expected to suffer recording rising sales.

The auto, leisure and cyc-ling retailer issued a half-year update yesterday in which like-for-like sales were up 5.5 per cent, encouraging returns against tough comparatives and a bad few months for the retail sector.

The group was particularly keen to highlight the success of its cycling and camping businesses. A res-urgence in outdoor pursuits as well as people becoming more fitness conscious has helped drive sales. The retailer, which was formerly owned by private equity group CVC Partners and brought to market in 2004, has diversified into three divisions. The range means it is less at the mercy of consumer cycles, with analysts labelling it a defensive play.

Another of its divisions is in-car electronics, where gizmos such as i-Pod players and SatNav systems have proved popular. While some have warned that a fall in demand would seriously dent the group's revenues, there is room for growth. Of about 33 million cars on the road, only about 4 million ave SatNavs installed.

Its third arm, the car parts and maintenance part, continues to provide the dull-but-worthy items and tends to remain resilient. The group is hoping to grow by keeping up with technology trends and expanding the number of stores in the UK and abroad. This June it marked its centenary year by opening three stores in three countries – it is esp-ecially targeting central Europe – and is looking to boost the number of UK sites from 433 to 550.

Halfords remains a solid performer in uncertain times for the retail market and trades at about a 4 per cent price-to-earnings discount to the sector. While the 3.73 per cent yield is fine, its price-to-earnings ratio of 14 times is relatively high. It has performed well, is solid defensively but investors looking for a quick return could be disappoin-ted. Hold.


Current price: 1,090p

Our view: Buy

It's no secret that Aveva has become one of the technology industry's favourite palindromes. The company, which provides three-dim-ensional plant design systems used by companies manufacturing ships, offshore oil rigs and nuclear plants, has consistently grown at impressive rates over the past few years and yesterday's trading statement did not disappoint.

Aveva said first-half res-ults would show strong growth due to the buoyancy of its target markets, specifically in Asia Pacific and central Europe. With no signs of a slowdown, Aveva raised its guidance for the year as a whole despite steep growth last year.

The trading momentum triggered a wave of analyst forecast increases, and two recommendation upgrades from Cazenove and Landsbanki. On average, consensus earnings forecasts rose around 10 per cent. Even so, analysts said there could still be more upgrades to come.

The legitimate concern is Aveva's rich valuation. The company trades at over 24 times 2008 forecasts, falling to less than 21 times 2009 estimates if its cash is stripped out. Although that is not cheap, bottom-line growth is moving back towards the 20 per cent level and with further upgrades possible, if not likely, the valuation looks justified. Given its valuation is not the highest in the high-growth tech sector, Aveva still looks to be one of the most attractive investments in the sector. Buy.

Ted Baker

Current price: 525.5p

Our View: Sell

Ted's been decidedly out of fashion on the stock market, at least since the start of this year. After years of runaway growth, it's been downhill all the way. Yesterday, however, the shares showed a bit of life after interim results which were reasonably well received. Is the company coming back into fashion with investors?

Up to a point. Profits were in line, but flat. While retail (Ted's own shops) and licen-sing (where it sells through a third party but retains control of the brand) were up, wholesale (where others sell) was down.

This was explained by the company saying it had ditched certain outlets that "weren't right for the brand". Whoever this was has not been explained. Worryingly, the company's operating cashflow (as opposed to profit) turned negative. Again, Ted had an explanation. It had simply ordered earlier in time for the much busier second half of the year.

Ted is one of those brand businesses, and it lives or dies on how that brand is perceived. So far the signs for the key second half look good, so perhaps it is worth looking beyond the cashflow and flat first half. But at 15 times full-year earnings, these shares are hardly end-of-year-sale steals and the prospective yield of just under 3 per cent is nothing to write home about.

There are also well flag-ged concerns about how active consumers will be in the run-up to Christmas, as the credit crunch feeds through into the real economy. Ted Baker has been an impressive growth story until now. But given this, it is not in fashion with us at the moment and we say sell the shares.