The Investment Column: Yell still not a good long-term bet

Time to pick up profits from Big Yellow - Itis Holdings still has a long, jammed road to travel
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The Independent Online

Shares in Yell, the owner of Yellow Pages, have performed well since the company's float 18 months ago. While some observers, including this column, have urged investors to steer clear, the shares have gone from 285p at float to 390p.

Shares in Yell, the owner of Yellow Pages, have performed well since the company's float 18 months ago. While some observers, including this column, have urged investors to steer clear, the shares have gone from 285p at float to 390p.

At its half-year results yesterday, Yell surprised everyone by announcing a 40 per cent rise in its dividend to 4.2p, with a similar sized uplift promised for the final payout. This should give a full-year dividend of about 12.6p and a yield of 3.4 per cent on the current share price.

Group turnover was up 6.3 per cent to £604.6m with the UK up 3.3 per cent and the United States 10.1 per cent higher. Earnings before interest, tax, depreciation and amortisation were up 9.8 per cent to £206m.

So, is this company that rarest of beasts, an income-generating growth stock?

It produces plenty of cash to pay dividends with enough left over to fund an acquisition programme in the US that will underpin the growth that management is anticipating. There is, of course, execution risk in any acquisition-led growth plan, although so far Yell's management seems to have avoided any cock-ups.

Fundamentally, revenue in the UK directories business is capped by an official pricing formula. Sales from UK printed directories, the core business, rose just 1.9 per cent to £300.9m as a result. The number of new advertisers grew just 1.2 per cent to 254,000. Turnover per advertiser was just 0.4 per cent higher. The company points to the growth of Yell.com as a sign of things to come - sales grew 42.6 per cent to £16.4m - but this is clearly tiny compared with the group as a whole.

In the US the new advertiser numbers are healthier, growing at 13.3 per cent with turnover per advertiser up 8.8 per cent. But the US is intensely competitive, the company admits, and growth rates could diminish. The incumbent US telecoms companies are fighting Yell all the way while rival independents, albeit smaller than Yell, are also battling for market share. At a price-earnings multiple of 13 times this year's earnings, we continue to feel this is not one for the long-term investor. Avoid.

Time to pick up profits from Big Yellow

Big Yellow's big yellow warehouses may well be an eyesore, but the share-price graph is pretty as a picture, at least over the past couple of years.

The company is replicating a US business model, erecting self-storage warehouses across the South-east where people can house their junk if they have accumulated too much stuff. There are 31 up and running with 11 more in the planning process and ambitions to find six to eight more locations every year. There are miles to go before the UK reaches the density of such warehouses common in the US, and Big Yellow is only now beginning to look up into the Midlands and the North of England.

Big Yellow ought to be a safe long-term bet on demographic trends. People move house more often and first-time buyers are able to afford only tiny homes. The company hit profitability ahead of plan and results yesterday met forecasts.

The question is whether current trends in the housing market could cause a wobble and how much store to set by the chief executive Nick Vetch's downbeat assessment of trading prospects yesterday.

The average customer keeps things in storage for just three months and more than half the business relates to the housing market - although some of this is home improvements and inheritance, rather than the house moves that look to be drying up. With the shares now in the real estate sector (where the fact they trade so close to the net asset value of 175p might hold them back), and having doubled since we said buy at the start of 2003, it is time to lock in profits.

Itis Holdings still has a long, jammed road to travel

There was a nasty spat earlier this year between Itis Holdings, which broadcasts traffic jam information to in-car navigation systems, and Trafficmaster, which has a rival means of collecting similar data. It was a ya-boo-sucks row centred on a Trafficmaster-commissioned report that denigrated the quality of Itis's information.

Itis gets that information from transmitters in 70,000 heavy road users, including lorries and National Express coaches. Trafficmaster has put up roadside sensors all over the country. Trafficmaster's system may well be the most accurate; Itis has something nearer to a standard in this nascent industry.

There is much to play for and Itis's main advantage has been that it transmits information via the radio spectrum (a sliver next to - and owned by - Classic FM since you ask) to devices that can be fitted in many major makes of cars.

Trafficmaster is now moving into radio transmission, so a horrible new competitive threat has emerged for Itis, whose cash reserves are just £5.5m. Meanwhile, it is hoping to improve its jam detection by tracking mobile phones as they switch from base station to base station, so development costs could stay high. Like much in this sector, Itis looks set to be a jam tomorrow stock for many years.

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