Diversification pays off for M&S

The Investment Column
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Sir Richard Greenbury, the Marks & Spencer chairman, has little time for the City. His view is that the Square Mile is far too interested in short-term quick fixes while M&S is all about the long term, investing now for a pay-back next year or even the next decade.

It may be unexciting but it is a strategy which has made the company Britain's pre-eminent retailer and significantly more profitable than either Tesco or Sainsbury's.

M&S was very keen to underline its consistency yesterday by detailing its results over the last five years Pre-tax profits have risen by 87 per cent over that period while dividends and earnings have increased by similar amounts.

What is telling however, is that although the share price has risen by 50 per cent in that time, M&S shares have underperformed the market by 10 per cent.

A major part of this under-performance is the company's great size, which makes it an unwieldy beast to manoeuvre. Another is that it has not delivered the earnings growth the market has expected.

Even so, within yesterday's record pounds 1.1bn profits for the year to 31 March the UK business increased profits by pounds 80m last year, which is no mean feat.

The trick has been to gradually diversify, adding more and more product areas whilst maintaining its grip on its the sectors on which it has built its reputation.

It is now not just underwear and woolly jumpers in which M&S has dominant market positions. Its shares in womenswear and men's tailoring also stand at 20-25 per cent. In footwear M&S ranks second only to the British Shoe Corporation, the troubled Sears division.

In foods, M&S's share may only be 3-4 per cent, but in ready-made meals it has half the market. The worry is that not just Sainsbury's but Tesco, Safeway and others are all increasing their offers in these areas, though M&S still has a significant lead.

In the current climate of food price deflation, the company has done well to maintain both its sales volumes and its margins.

Other recent moves have been into jewellery and wedding lists, and a home shopping trial starts in 1998. Financial services, now a decade-old business for M&S, is showing strong growth and contributed pounds 75m of profit last year.

And while M&S puts the pressure on rivals at home it is gradually expanding abroad. It now has 35 stores in Europe, a number it would like to double as its seeks more stores in Germany, Spain and Poland.

The Far East is also being targeted for expansion. Even Japan, ruled out as too costly a market to enter three years ago, is being considered again. In America, the expensive Brooks Brothers acquisition is gradually turning the corner and made pounds 15m last year. The only blot on the landscape is the small Canadian operation, where losses doubled.

On Merrill Lynch's forecast of pounds 1.19bn for the current year, the shares, down 16p to 493p yesterday, trade on a forward rating of 17. With the City running scared of certain retail stocks such as Argos, Burton and the friendless Storehouse, M&S remains a solid hold.

Royal & Sun looks to cut costs

Perhaps not surprisingly, the underlying trading messages to emerge from Royal & Sun Alliance's first-quarter results were pretty much in line with last week's from General Accident and Commercial Union. Recovery from last year's harsh winter in the US, motor premiums edging upwards at home offset by a nasty rise in subsidence claims, and good growth in the long term life assurance operation.

That led to a 24 per cent increase in operating profit (the key measure for the sector) from pounds 157m to pounds 195m, with general insurance chipping in pounds 135m and the smaller life arm pounds 54m. Earnings per share rose from 7.2p to 8.3p, leaving a forecast 10 per cent rise in the dividend for the year as a whole well on track.

Royal & Sun is a different animal from its peers, however, thanks to last year's pounds 6bn merger. Unlike the other two it has great scope for cost- cutting and is relatively over-capitalised, which means surplus funds can be handed back to shareholders through buy-backs. The first of those, of 15 million shares, or 1 per cent of the company's capital, happened yesterday and more will follow before July.

The slide in the shares, by 8.5p to 481p, was a reflection of some impatience that the buy-back was not announced with the results. It also follows a strong run-up in the shares over the last year to a point where they stand at a sizeable premium to net assets, traditionally the benchmark for composite insurers.

Shareholders' funds nudged up during the quarter from 399p to 411p and they have since moved ahead to 427p thanks to strong markets. At that level the shares stand at a 12 per cent premium, not as highly rated as GA and CU but demanding by the standards of the discount the market expects to compensate for the volatility of general insurance. The key for Royal & Sun is the extent to which it can cut costs faster than the pounds 175m a year it promised at the time of the merger. By yesterday, savings were running at an annualised pounds 44m and most analysts agreed that the promised rate should be easily matched by next year.

If the City warms to the idea that composites should be given more credit for the steady growth of their better quality life assurance profits, the shares, on a prospective dividend yield of 5.5 per cent, could still have a little way to go. Fair value.

Optimism justified at Jarvis Porter

Jarvis Porter's full-year figures look rather alarming on the surface. Pre-tax profits for the year to the end of February fell 30 per cent to pounds 10.2m even before the label printer's pounds 2m reorganisation provision. Sales growth was just 5 per cent at pounds 95.4m and margins slumped from 16.1 per cent to 13.2 per cent before acquisitions. Hardly positive, yet the market edged the group's share price up 1p to 205.5p.

Cautious optimism looks justified. For a start these figures reflect a number of one-offs. The loss of a contract supplying video labels to 3M and destocking at Guinness prior to the relaunch of its Johnny Walker whisky brand cost Jarvis around pounds 2m. The group was also hit when one of its biggest pan-European customers tightened the price terms on a contract to print toiletries labels mid-year.

More importantly, while Jarvis still needs to improve costs and efficiency, it is a significant player in some specialised markets. Size is important in the label world where multinational customers are increasingly centralising sourcing and cutting out smaller suppliers. Jarvis is mainland Europe's biggest label supplier, though it has just 5 per cent of a pounds 2bn market.

Jarvis is seeing the benefits - overall sales volumes rose 10 per cent last year and in the toiletries side volumes were up almost a fifth. Though the downside is falling prices - customers are paying their favoured suppliers less for their business - Richard Brewster, Jarvis' chief executive, is making tough statements on costs.

Unlike label groups like Ferguson which supply to commodity markets like textiles and food where there is fierce competition, Jarvis is well positioned in more hi-tech markets like branded drinks, drugs and, following its acquisition of Donprint, in the fast growing computer market. Margins there are a juicy 15 per cent. The group still has plenty to do, though. A quarter of its business in the commodity toiletry labels market is too much. The computer side looks much better, and Jarvis is likely to consolidate its position with another significant acquisition this year.

This is a tough market, where pressures on margins will continue. However, on analysts' forecasts of around pounds 14.3m for the year to 1998, the shares trade on a forward price/earnings ratio of 11. This looks on the cheap side, given that Ferguson trades on nine times this year. Worth a gamble.