Investment Column: Burberry is a luxury worth holding on to

Dairy Crest Group; Evolution Group
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The Independent Online

Our view: Hold

Share price: 395.75p (-5.5p)

Burberry, the luxury goods group, hailed its full-year numbers as a success yesterday after reporting that revenues, at £1.2bn, had smashed through the £1bn barrier for the first time.

The group's finance director, Stacey Cartwright, argued that with Burberry's £50m cost-saving exercise well under way, £8m of net cash on the balance sheet and a maintained dividend, the company was moving at full steam ahead.

Even an adjusted pre-tax profits fall was good news, said Ms Cartwright, who pointed out that Burberry had hit its full-year targets and iwas gaining market share.

Investors have enjoyed the last quarter, with the stock responding well to improved sentiment in the market and growing by nearly 60 per cent. We are minded to argue that now would be a good time to take profits for existing holders, and that it might be a tad late for those not already in the shares to enjoy the benefits. We agree that the cost-cutting measures will do wonders for the company in the long run, but would worry that today's buyer might be taking on an overvalued stock.

The experts at Investec argue: "The shares have outperformed the broader market by 40 per cent in the past quarter, although performance has been volatile. As a result, the shares are valued at a small premium to the comparator luxury goods and retail group... on a price-earnings ratio basis and a slightly wider premium of 20 per cent on enterprise value to Ebitda." The watchers advise clients to hold the stock, to which they ascribe a target price of 370p.

Despite having reservations about the short-term potential of the shares in what the company itself regards as an uncertain market, we do recognise that the group continues to do well. The stock is one of the better performers in its sector and will add stability, if not growth, to a portfolio. Hold.

Dairy Crest Group

Our view: Sell

Share price: 319.25p (+0.5p)

As a rule, investors should be wary of companies that cut the dividend. For that reason it is difficult to recommend Dairy Crest, the maker of Cathedral City cheese and Clover spread, which yesterday announced that it was cutting future investor payments by 25 per cent. Full-year profits were also down, by 8 per cent.

The company said it was slashing the dividend to save cash and cut its pensions deficit. We would agree that both are worthy actions, but also that there are plenty of other investment options available for punters that do not include taking the pain of sorting out holes in a pension fund. There has been good news for investors, not least the 50 per cent increase in the value of the stock since the start of the year. The improvement in the shares is great, but we think punters should now take profits.

"On our forecasts, the group is trading on a 2010 enterprise value to Ebitda of six times, which is a small premium to the Fast Moving Consumer Goods small and mid cap average," say those at Investec.

Dairy Crest's chief executive, Mark Allen, argues that its brands are strong and that the dividend cut is the last part of an effort to reposition the company. The group's debt is now at manageable levels.

It is tough, however, to back an expensive stock when the dividend is cut, regardless of anything else. For that reason we would give Dairy Crest a wide berth. Sell.

Evolution Group

Our view: Buy

Share price: 129p (+8p)

Evolution has been bucking the trend in recent months.

As almost every institution in the City has been axing employees left, right and centre, the brokerage and investment bank has been taking on a host of new people, including hiring whole teams in some cases as it seeks to tap into what it clearly expects will be an imminent upswing.

Judging by the interim management statement issued by the group yesterday, the strategy is working. The company is trading profitably, which is more than can be said for most, while its share price has grown by more than 25 per cent in the past three months. Private client funds under management were up £85m in the first quarter.

Despite what is undoubtedly good news, investors should not forget that financial markets are still in a precarious state. The analysts at Kelton Fox-Pitt argue that the recent good news is already priced into the stock and, for investors, some of the gloss is starting to come off.

Evolution is clearly an ambitious group and is positioning itself to do well from an upturn in economic circumstances. The bet is on when this will come but, even if it is not soon, investors can still take solace from the group's sector-beating performance. Buy.

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