Hold on to Morrisons for a solid defensive play in a bear market

Strength in housing makes BPB a buy; For nostalgia and good value try caravanning
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The Independent Online

SLOWDOWN, WHAT slowdown? That was the message from those canny operators at Wm Morrison supermarkets yesterday. Another top-of-the-range set of figures showed only a tiny slip in like-for-likes sales growth from 5.7 per cent in the first half to 5 per cent in current trading.

Slowdown, what slowdown? That was the message from those canny operators at Wm Morrison supermarkets yesterday. Another top-of-the-range set of figures showed only a tiny slip in like-for-likes sales growth from 5.7 per cent in the first half to 5 per cent in current trading.

While rivals talk the market down, saying last year's sales surges were an anomaly, Morrisons folk are talking about a slowdown in the past tense.

The result was an 8 per cent leap in the share price to 218.5p, in a falling market.

How do they do it? A major factor is the group's no-nonsense approach to prices, including a host of "buy-one get one free" offers that keep the customers coming in. There are no loyalty cards, no big moves into clothing, just low prices on groceries.

But the key to the 16 per cent rise in half-year profits was less about sales and more about margins. Gross margins were up a full percen- tage point due to greater distribution of goods through its own facilities as Morrisons has in-house businesses that pack its meat, and prepare fresh produce.

It also seems likely that Morrisons has benefited from Asda's move to reduce the amount of selling space it devotes to food as it pushes its non-food ranges hard. Morrisons, which prefers to walk the walk than talk the talk, has quietly got on with the business of being a food retailer.

Is there more to go for in the shares? Analysts at CSFB were saying no yesterday. They say that Morrisons shares trade at a chunky premium to Tesco and that this quite high enough, thank you.

But Merrill Lynch, which issued a research note yesterday entitled "King Ken does it again", points out that this is a bear market and Morrisons is just the sort of share you want to own in such circumstances. It is the sort of share Warren Buffett would love.

So while the share are clearly not cheap on a forward p/e of 18 times assuming full-year profits of £272m, they remain a defensive play that is unlikely to let you down. A rock solid hold that should be bought on any sign of weakness.

Strength in housing makes BPB a buy

Who would have thought it? BPB, the plasterboard and plaster maker, is hovering on the edge of the FTSE 100. This makes it bigger than British Airways and EMI, and with the prospect of joining other old economy stalwarts Rexham and Bunzl in the index of Britain's largest companies.

BPB's shares were hammered in 1999 and 2000 due to the new economy mania of investors. However, this has not been its only problem. BPB was heavily criticised for overpaying for a US business, Celotex, two years ago, when plasterboard reached a peak of $160 (£106) a unit. This drove up the price of the acquisition, just before plasterboard plummeted to $90.

Since then, the company has slashed costs by $50m. In a trading statement yesterday, BPB warned it would take a further restructuring cost of £10m in the six months to 30 September. BPB's shares dipped 7p to 273.25p, as it also warned the half-year results would include a £3m charge for boosting its pension fund.

BPB's size – it is the world's largest plasterboard company as well as number one in the UK – is presenting problems. It is the subject of an investigation by the competition authorities of the EU and could be fined if it is found to have acted in an uncompetitive way.

However, this already looks like it has been priced into BPB's shares. The company is also trying to address the problem by aggressively growing its business in places such as Italy, where it is less dominant.

BPB is forecast to make a pre-tax profit of £196m for the year, as the worst of the pain in the US business appears to be over.

The company is riding strongly in the UK and US on the back of a continuing strong house building market. This may slow in both countries, but BPB's forward p/e ratio of 10 is undemanding. Buy.

For nostalgia and good value try caravanning

The flotation of Parkdean Holidays in May prompted the same whiff of nostalgia as the sight of one of its caravans to parents of a certain age once their children have left home.

The caravan park operator, which was founded in the Eighties by its current executive chairman, Graham Wallace, has spent the past decade switching owners more frequently than a touring caravan driver switches caravan sites on a jaunt around Britain. It has, variously, been a quoted company, been taken over by the now-defunct leisure conglomerate Vardon, belonged to Hard Rock Café operator Rank and, most recently, had venture-capital backing from 3i, the venture capitalists.

The rationale behind May's re-listing was to obtain the firepower to consolidate what is one of Britain's most fragmented markets. Parkdean owns just 12 sites out of a UK total of 3,500. The market leader, the privately owned Bourne Leisure, operates 40 sites.

Parkdean's house broker reckons the company should manage to grow earnings at a double-digit compound annual growth rate. Although caravan holidays in soggy Britain can lack the excitement of a fortnight in the Bahamas, the attraction of Parkdean's sites led to a 14.5 per cent jump in underlying revenue over the summer. This means the group should beat its broker's targets to report an operating profit of £8.6m in the year to 31 October.

Parkdean can benefit from a centralised marketing system and a holiday brochure that features sites from Cornwall to Scotland, thereby enticing regular customers to travel further afield. Adding extra bells and whistles to its sites in the form of new bars and indoor leisure complexes, should also boost revenue.

The shares, unchanged at 97.5p, are below their 100p flotation price, but have proved defensive in a bear market. They trade on a p/e ratio of 7.5 times 2003 earnings, which makes them reasonable value, if unexciting.

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