CITY TALK: Avis is driving on a skid-pan
Sunday 23 February 1997
However, interested investors should be aware of the following fact: Avis wants to bill itself as a pure transport play, and as such, has requested it be classified in that sector. Transport stocks in general - look at Stagecoach, or National Express - have been on a roll for a good while, and there is every benefit to be had from being named in such good company.
But hang on a second - Eurodollar, another car-rental firm, and Avis's nearest stock market rival, is classified as a distributor. Given that many of the companies in that sector - Car Group, DC Cook and Reg Vardy - are car traders, there is some sense for Eurodollar's inclusion as a distributor.
Although classifications can be confusing, they are also relevant to investors' views, and affect the weightings that institutions place on individual stocks.
The next meeting of the classification committee is on Monday 3 March, when a decision is expected. Avis will be arguing hard for its case, but frankly, there seems little reason why it should not be included in the same sector as Eurodollar. Sadly, that will do it no favours, as Eurodollar shocked the market with a spate of three profit warnings in the space of a year after coming to the market in 1994.
Finally, being classified as a transport play will encourage investors to focus their attention on the demand for car rental and hire - which would seem to be the fundamental business of the group. In fact, Avis's profitability is just as subject to the vagaries of car prices in the new and second-hand market. Last year it spent pounds 1.5bn on buying cars - making it the largest private purchaser of cars in Europe. Any upturn in the new car market - or a downturn in the used car market - can have a dramatic impact on Avis's bottom line. This will be an area the company will be keen to downplay. Avoid.
Looking even further ahead, to the next quarterly meeting of the FT-SE 100 Index committee, set for 12 March, the brief will be to decide on who is in and who is out of the blue-chip rankings. One of the contenders for inclusion will be Compass Group, the contract catering and restaurant services company. Heady growth has propelled it to a market capitalisation of pounds 2.3bn; sales have risen from pounds 345m in 1992 to pounds 2.65bn in 1996. And it has a growth rating to match; one reason why the more conservative City fund managers are loath to overexpose themselves to the shares. And despite glowing reports, the shares are not so closely followed as they remain relatively illiquid.
The shares have climbed from around 500p a year ago to their current 728.5p, up 5p on Friday, having been exceptionally strong since the turn of the year.
Should the group hit index status, a phenomenal technical situation could develop, especially if overseas institutions buy - in which case, expect a sharp upward movement. Other candidates for promotion include British Land, Electrocomponents, MEPC, Premier Farnell, and Southern Electricity.
Figures are due next week from Mayflower Corporation, the automotive engineer. The company has won the contract to supply the rear body of the MGF sports car, the new model which is selling like gangbusters, as one market source put it. Last week the shares closed strongly higher, up 4.5p to 141.5p on Friday, and up from 132p over the previous two weeks. There are hints in some quarters to expect further upward momentum after the figures. We shall see.
Centrica, the domestic pipeline business of the former British Gas, has had a dismal week. The shares, having opened at 76p on Monday, closed the week at 68.5p, down 1.75p again on Friday, in heavy volumes. The angst seems to be a mix of the potentially damaging take-or-pay situation over North Sea gas contracts, and tougher competition. Yet, like Railtrack - whose shares have continued to surge in the opposite direction - Centrica has unique assets: an enormous customer database, and the Morecambe Bay gas field. Surely some upside.
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