Investment Column: Carphone is not as pricey as it looks


Carphone Warehouse

Our view: Buy

Share price: 197.75p (+3p)

Yesterday was a red-letter day for Carphone Warehouse, which issued the first update after its demerger from the broadband business Talk Talk. In addition to its fourth quarter and annual strategy update, much of the attention centred on Carphone Warehouse's 50 per cent stake in Best Buy Europe, the electronics retailer, ahead of the launch of Best Buy's first British store in Thurrock, Essex, on Friday.

However, given that only five Best Buy stores in the UK are confirmed so far, the real connectivity for investors lies elsewhere in the short term. And elsewhere is looking good: the group posted its third profits upgrade in six months and signalled a strong performance from Best Buy Europe, which includes the Carphone Warehouse and The Phone House branded stores in the UK and Europe, and Carphone's mobile phone shops in Best Buy stores in the US.

Carphone Warehouse Europe delivered an 18 per cent jump in operating profit to £114m for the year to March 2010, and there was a £46m contribution from the outlets run by Best Buy Mobile in the US, a partnership that preceded the UK launch. In fact, the profit share with Best Buy Mobile US could soon start to move the dial for the company, and analysts at Citigroup have forecast an accelerated roll-out of standalone stores from 71 to 500 over the next three years. There were a few missed calls, notably a £9m loss on the group's 47.5 per cent stake in Virgin Mobile France. But Carphone said that following its acquisition of Tele2 in December, cost savings from both businesses were starting to have a "meaningful" effect on profits.

Carphone trades on 17.2 times 2011 forecast earnings, which looks high enough. But with the US venture poised for a break-out and continuing good numbers in Europe, it could be argued the company is not as expensive as it appears to be. We think so. Buy.

Kazakhmys

Our view: buy

Share price: 1480p (+50p)

Investors cannot ignore the mining companies on the FTSE 100, given that the sector now makes up more than 10 per cent of the index.

Anyone who has put their money into the industry in the past year has enjoyed exceptional returns, as commodity prices have surged along with improvements in global demand. Copper has been an especially lucrative metal and has helped Kazakhstan-based Kazakhmys, for all intents and purposes a proxy for the copper price, to record a 200 per cent rise in its share price over the past 12 months.

The question for investors has to be: is this a bubble that will inevitably pop sooner or later, or is there sufficient structural demand that will continue to push the stock?

We are in the second of these two camps. Chinese GDP is expected to grow at near double-digit levels this year, prompting more demand for resources. Kazakhmys said yesterday that it had penned a joint venture with China's Jinchuan Group to share its high-cost Aktogay project, which is located near the Chinese border – no harm in keeping your major client sweet, we would say.

The stars are aligned for miners such as Kazakhmys and, trading on a 2010 forecast multiple of 7.7 times, the group's shares are still priced at a huge 30 per cent discount to the rest of the buoyant copper sector.

The dividend yield, at a nudge over 1 per cent, is poor, and any problems with the copper market will hit undoubtedly hit Kazakhmys hard. Nonetheless, we backed the group at 1186p last October and see no reason to change our minds now. Buy.

Redrow

Our view: Buy

Share price: 151.4p (+0.3p)

Better times ahead for Redrow? The property developer is forecasting a return to profit in the second half, and Steve Morgan's return to the group he founded (he runs it as chairman) has done nothing to harm confidence in the stock. Still, the company continues to forecast a "challenging" year, not least because of uncertainties driven by the election and a housing market which remains choppy (Hometrack's figures yesterday were gloomy).

Nonetheless, sales are picking up at Redrow, which has a substantial landbank and expects to complete 2,500 transactions by the full year. In fact, the shares trade at a discount of about 25 per cent to the value of that bank. We wouldn't be too concerned with the outlook statement being downbeat – the company is probably indulging in "expectations management". It is cheaper that most rivals and with the sector historically trading at 150 per cent of book, we would buy.

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