Investment Column: Stoves stands up to rivals' heat

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The Independent Online
Floated at 163p a year ago, shares in Merseyside-based domestic cooker manufacturer Stoves have had a tremendous run, peaking at 304p earlier this year before coming off the boil somewhat.

Such outperformance is all the more remarkable given the backdrop of weak selling prices, particularly at the lower end of the appliance range, and fierce competition from far larger rivals such as Electrolux, Whirlpool and Bosch-Siemens.

Yesterday's figures suggest investors' faith in the company has not been misplaced. Pre-tax profits rose 42 per cent to pounds 4.2m in the year to May 1996 on turnover 29 per cent higher at pounds 63m. Earnings per share were static at 14.2p as Stoves incurred an 18 per cent tax charge after unrelieved tax losses became fully utilised. A maiden full-year dividend of 5.2p will also be paid.

The figures hide a year of two halves. Raw material price rises for steel, aluminium and plastics, which hit the first-half figures, have abated, while the adverse trading impact of last year's long, hot summer has not been repeated. Indeed, Stoves says the first two months of the current year have seen "considerable growth", helped in part by the pick-up in the housing market.

So far growth has been managed well, with sales nearly trebling but staff numbers only doubling to just under 1,000 since the management buyout from Yale & Valor in 1989 and the revival of the pre-war Stoves brand name.

Stoves' main challenge is to prevent margin erosion. Although its share of the UK market rose from 13 to 16 per cent, gross margins slipped by 1.3 points to 19.3 per cent in the period, despite the increase in sales. Stoves has also moved into unknown territory by taking over responsibility for after-sales service from retailers such as Currys and British Gas.

Stoves will also have to pay a full tax charge this year, limiting the expected advance in earnings per share to a pedestrian-looking 8 per cent.

All of which makes the forward multiple of 17, based on house broker Kleinwort Benson's pre-tax profits forecast of pounds 5.8m, difficult to justify. High enough.