Investment Column: Britvic may go flat as the economy slows

Kingfisher; Domino's Pizza
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The Independent Online

Our view: Hold

Share price: 476.2p (-14.4p)

Britvic, the group behind household names from Robinsons to Tango,revels in selling an extraordinary 1.9bn litres of soft drinks around the world each year. It's a lucrative business: Britvic said yesterday that annual revenues have jumped 14.6 per cent to £1.1bn from £878.5m, and that pre-tax profits are up by almost a fifth from £86.1m in the 52 weeks to 27 September 2009, to £104.6m a year later.

The chief executive Paul Moody hailed the group's expansion during a difficult time, with revenues growing in both fizzy and still soft drinks. Revenues at the international business as a whole rose 15.2 per cent, with the integration of Britvic France "performing well".

Analysts were pleased with the widening of the group's margins, but warned that Britvic may struggle to maintain these levels of profitability next year, with the cost of the raw materials set to rise by up to 6 per cent. This will be felt from the first half onwards, and the pressure comes on top of the concerns about consumer spending. Greg Feehely, an analyst at Altium Securities, called it "not a bad performance, given the trading backdrop", but warned that the outlook will be challenging.

This is a solid stock that trades on an undemanding ratio of 11.8 times price to earnings. The 4.3 per cent dividend yield weighs in its favour, too.

Britvic is confident it is "in good shape to deliver another robust set of results for the year ahead". However, we reckon that with the wider economic outlook now turning against it, the fizzy pop-maker may lose some of its effervescence next year. Hold

Kingfisher

Our view: Hold

Share price: 254.9 (+17.1p)

Kingfisher, owner of the B&Q chain, has DIY enthusiasts and tradesmen in France and Poland to thank for a robust performance during its third quarter. The global DIY group, which has 843 stores in eight countries in Asia and Europe, crafted a 6 per cent rise in retail profits to £240m for the three months to 2 December, in line with City expectations. Its French division's Castorama and Brico Depot accounted for more than half, after growing profits by 3.1 per cent to £130m, driven by sales and margin growth. Poland has also bounced back to form and contributed profits of £45m – nearly matching the £46m made in the UK and Ireland. In addition, B&Q China expects to turn in a profit in the fourth quarter, its first in three years in the country.

Looking ahead, City analysts are bullish about the positive impact on gross margins of Kingfisher's self-help measures, notably its ambition to grow direct sourcing. However, in the UK, where it operates the market leader B&Q and the Screwfix outlets, profits were flat in the last quarter and trading conditions are likely to remain tough over the next year.

That said, Kingfisher is not reliant on a consumer recovery in the UK to deliver the goods, and its shares trade on a reasonable earnings multiple of 11.5 for 2011-12. Hold.

Domino's Pizza

Our view: Buy

Share price: 550.5p (+8.5p)

The snow, we are told, is bad for the economy. Airports are shut, the trains are late and millions of consumers are stuck indoors. Still, as every astute investor knows, disruptions such as these, even if negative overall, also present opportunities. And Domino's Pizza is one of them.

As broker Seymour Pierce highlights, the last two cold snaps boosted like-for-like sales as peckish consumers, wary of slippery pavements, decided to phone for fast food. Domino's was ready to meet the challenge with its fleet of scooters, which made inroads in areas where larger vehicles were held back by the snow. That, along with the fact that franchisees tend to brave the cold to man their stores, boosted business when others were left huddling in front of heaters.

This narrative is coloured somewhat by the fact that a prolonged period of bad weather could hinder the lorries that Domino's uses to supply its franchisees. The valuation also causes us to pause for thought, with Domino's trading on multiples of more than 20 times forecast earnings for next year, according to Goldman Sachs.

Still, given its success over previous winters, we think the company deserves the benefit of the doubt. Moreover, continued bad weather is likely to weigh on the wider retail and restaurant sector, and with that backdrop, the market is likely to go for the relative winners. Domino's is well placed to capitalise on that. Buy.

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