The Investment Column: Reckitt Benckiser is a core holding

Hold on to Bellway despite housing jitters - High street competition weighs on N Brown
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The Independent Online

When Reckitt Benckiser, the consumer goods giant, recently reiterated that it was on track to deliver its forecasted earnings growth in the face of dismal trading reports from rivals Unilever and Colgate, it came across as rather smug. But the company's self-congratulatory stance was proved justified yesterday when, reporting its third-quarter earnings, it upgraded its earnings forecasts further.

When Reckitt Benckiser, the consumer goods giant, recently reiterated that it was on track to deliver its forecasted earnings growth in the face of dismal trading reports from rivals Unilever and Colgate, it came across as rather smug. But the company's self-congratulatory stance was proved justified yesterday when, reporting its third-quarter earnings, it upgraded its earnings forecasts further.

The company announced a 22 per cent jump in third-quarter profits and said it expected full-year revenue growth of 9 per cent, up from its previous 7 per cent target. The group's shares closed up 5 per cent at 1,478p.

This news came despite unhelpful market conditions of rising raw material costs and a slump in consumer spending across many of its markets. These are hurting its competitors, which are having to throw additional funds behind their brands at the expense of profits.

But Reckitt has overcome these problems thanks to good product innovation and a tight control of costs. Its 15 core "power" brands, such as Airwick, Harpic, Calgon and Dettol, are growing at 13 per cent, which is outstripping the rest of the company's products. The astonishing Vanish Oxi fabric cleaner, for example, a miracle stain remover, has become a must-have item in many a kitchen cupboard. It was the main driver behind a 9 per cent growth in its fabric care revenues, and the company has developed a carpet version. It expects to have a 20 per cent operating margin across the group in 2006.

Readers who followed this column's advice in November to buy the shares at 1,270p are sitting on a nice uplift. But despite promises of further strong earnings growth, the shares are now trading at about 17 times earnings. Reckitt is starting to look a little too fully valued to represent a great buying opportunity. Still, it has demonstrated an impressive ability to improve its products and its market share. The shares should remain a core holding.

Hold on to Bellway despite housing jitters

While Britain braces itself for a possible crash in the property market, housebuilders continue to report record results. Yesterday it was the turn of Bellway, a builder based in the North-east which produces lower to mid-range homes (average price £161,400).

Turnover broke through the £1bn mark for the first time, for the year ended July. Pre-tax profit was 21 per cent higher, at £205.5m, while the dividend was jacked up 25 per cent to 25p.

Bellway said that the good times should continue, as long as further rate rises do not spoil the party. The forward sales book stood at £587m in July, more than £200m up on the previous year (representing more than 50 per cent of the target for the current year).

While this providesreassurance on prospects, there is every reason to be cautious about the housing market now - especially the buy-to-let sector.

Charles Stanley, the broker, notes that the Bellway, at 683p, trades on a forward multiple of 5.2, similar to Persimmon. While these multiples are cheap compared with other sectors, rating are likely to remain derisory in housebuilding for some time. Hold.

High street competition weighs on N Brown

N Brown, the Manchester-based home shopping company, yesterday claimed it was planning to capitalise on the "emotional bond all women have with shoes" by launching a website selling ladies' footwear.

Shareholders must be hoping that the new VivalaDiva online business is more successful than the company's other offshoots. House of Stirling, which sells clothes on a weekly collected credit system, and Teleview, a televisions rental business, have been beset with problems that contributed to group half-year results that saw sales down 2.3 per cent to £225.6m and operating profit lower by 12 per cent at £24.8m.

Alan White, the chief executive, has put the company's core catalogue business on a sounder footing. It recorded a 0.7 per cent increase in sales to £206.3m and operating profits 6.7 per cent higher at £27.9m. But after a string of profits warnings this company still lacks credibility. Launching glamorous sounding online retail propositions is not going to transform a business that still needs a lot of fixing at its centre. It remains to be seen whether even its core business can maintain any momentum in the face of a relentlessly competitive high street.

In clothing it focuses on larger sizes, particularly for younger women. But its attention is being distracted by poorly performing lines such as home, leisure and electricals.

In the first seven weeks of the current period, core home shopping sales are flat compared with last year and group sales are down 1.5 per cent. The shares, at 118p, trade on a price earnings ratio of 10.5 times this year's earnings. Its shares stand where they were 12 months ago. Sell.

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