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The Investment Column: Time to take Whitbread off the menu and bank profits made since 2000

Axis-Shield is too pricey for now; Steer clear of Avis as it battles consumer slide

Stephen Foley
Friday 02 September 2005 00:00 BST
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Everything the group does is either at a standstill or going backwards with once exception - its Premier Travel Inn budget hotels. Yes, operations such as Costa Coffee are doing well but selling coffee on stations is a tiny business in the greater scheme of this FTSE 100 leisure group.

Alan Parker, the newish chief executive, used to run Whitbread's hotels when he was a more coltish divisional director. He did well to nurture the budget hotels through the 1990s and made sure the group ended up with at least one growth business when he took over at the helm. However, one is not enough for a company that insists it is fighting on several fronts.

Yesterday's statement showed Premier Travel Inn grew sales at 8 per cent in the 24 weeks to 18 August compared to the same period last year. So much for the good news.

Like-for-like sales at its pub restaurants, Brewers Fayre, shrank by 1 per cent. Its high street restaurants - Pizza Hut, TGI Friday's and Costa - went backwards by 1.7 per cent while David Lloyd Leisure, the health clubs business, managed 0.1 per cent organic growth. This is simply not good enough. Mr Parker trotted out the usual excuses - "continuing weakness in retail", "London bombings" and so on.

However, its Brewers Fayre pub eateries cannot meet the challenge of increasingly popular gastro-type pubs. Its menus are unappetising and service is mediocre. Whitbread's trading statement did address this, saying changes were being made to menu and "service style" to drive volume but there is a long way to go. Pizza Hut and TGI Friday's are getting better but it smacks of complacency for the management to blame the general retail slowdown and terrorism for their woes.

Put simply, Whitbread is a conglomerate throwback and it needs to focus. Its share price has been carried along by regular cash handouts to shareholders, the odd strategic lurch, such as selling tenanted pubs and Marriott Hotels, and hopes of a bid.

A break-up is now the only thing that justifies a share price of 978p and a price earnings ratio of 17. The brave could take a punt on a bid, but it's probably wiser to take the substantial profits that investors have made since 2000. Sell.

Axis-Shield is too pricey for now

Axis-Shield's decision in 2001 to make a big splurge on research and development looks like paying off.

The company works in diagnostics, making tests for conditions such as diabetes, rheumatoid arthritis and heart complaints, in two different divisions. Its laboratory division makes tests for use on the big machines used in labs where samples are sent. Its point-of-care division sells a 10-year-old desktop machine called NycoCard, used in doctors' surgeries.

And in both divisions, it now has products about to come on the market. Most promisingly, it has a new surgery machine, called Afinion, which has just won approval in Europe and the US and which yesterday signed Abbott Laboratories, the giant American medical supplier, as a distribution partner in the US. That sent Axis-Shield shares up almost 10 per cent to 362p.

The laboratory division could launch a dozen tests over the next two years, including several new ones for Abbott's machines. The reliance on Abbott might look a concern, but it is a symbiotic relationship and Abbott-related sales will account for only one-third, even if sales of Afinion soar.

So we missed a trick by advising investors to hold off back in 2003. Now, Axis-Shield is at a tricky inflection point, back in the black now its research spending is coming down, but looking expensive given the modest profits expected while the new products are slowly rolled out. With regret, still pass.

Steer clear of Avis as it battles consumer slide

It all went wrong at once for Avis Europe, the car-rental business. US visitors to the UK declined after the September 11 attacks. The European economy has failed to manage anything other than sluggish growth and corporate customers have kept belts tight. And all the while, the internet has allowed its customers to compare tariffs across the industry, forcing everyone to cut their prices. Profits went downhill faster than a hire car with the handbrake off, and Avis was forced into a £110m rescue rights issue this summer.

So what now? The new cash is already being ploughed into phase one of a recovery plan not very excitingly entitled Fix the Basics. That means things such as new drop-off arrangements to make life easier for customers; an improved internet-booking facility; lots of marketing schemes, particularly to encourage US visitors to use Avis; and the centralisation of administrative work in low-cost Budapest.

This is a recovery plan that looks like the stuff of everyday business. Something more dramatic might be needed to improve margins to the levels anticipated at the time of the rights issue, since there is still overcapacity in the industry, as shown by yesterday's interim results.

There is some hope in moving Avis upmarket, with posher cars and a higher mark-up. But one-third of Avis's business is for the leisure market, and with consumer spending under some pressure, demand here must be at risk. Corporate hire, 24 per cent of sales, will always be the most price sensitive. The shares already factor in a recovery and a soupçon of bid speculation. Avoid.

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