Investment Column: Carphone Warehouse is worth keeping on hold

Bloomsbury Publishing; William Hill
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The Independent Online

Our view: Cautious hold

Share price: 107.75p (+8.5p)

Carphone Warehouse, the mobile phone retailer and broadband provider, yesterday issued a mixed bag of an interim management statement, saying that while retail revenues in the three months to the end of December were up 13 per cent, the group expects 2009 profits to be flat as the hellish state of the high street bites.

The strong Christmas trading period was welcomed by investors, with the shares closing up 8.6 per cent on the day, even if the company's margin suffered as special offers were used to entice punters through the door.

Buyers should be wary, however. The group's retail arm is exposed to the poor economic environment, and while it is confident of surviving the recession – no mean feat for a retailer these days – even back in November, Carphone Warehouse was warning of a gloomy outlook. Most commentators would say things look worse than in November, which should make buyers nervous.

The group is in defensive mode, and has cash generation of £150m in its sights for this year, which should support the share price to some extent. The fact that the group's founders, the chief executive, Charles Dunstone, and former deputy chairman, David Ross, hold 52 per cent of the shares between them should lend some stability.

This year is likely to be a big one for the group, with a change of emphasis to cash-making and costs-cutting, while also deciding whether to split its retail and broadband divisions. We think investors should wait to see how the year develops. Cautious hold.

Bloomsbury Publishing

Our view: Buy

Share price: 157.5p (+4.5p)

Nigel Newton, chief executive of Bloomsbury, says that books are a humble and enlightening pleasure in these times of woe. Sceptics who think that Mr Newton is waxing lyrical to hide what is a tough period for the industry should take a look at the hard facts. Spin doctors representing a host of industries are trying to persuade journalists that investors believe that their sector will do well in the recession, but looking at the performance of Bloomsbury's stock in the last 12 months, Mr Newton's assertion is on the money. The shares are flat in the last year; a stunning performance relative to most others.

The unconverted may point to the fact that Bloomsbury, which yesterday issued an in-line trading statement, has in recent years benefited from the Harry Potter books, and as sales wane, so the group will struggle. The key, says Mr Newton, is ensuring that the firm has an impressive list of books for the future, and with offerings from John Irving, William Boyd and Margaret Atwood this year, all should be fine. With acquisitions in academic publishing last year, including cricket's Wisden almanac, and deals in the Middle East, there are several catalysts for growth.

Watchers at Dresdner Kleinwort advise clients to buy, with a price target of 168p. The analysts say that trading on 16 times its 2009 price earnings ratio, the group is a safe bet for investors, and with £50m in cash on the balance sheet, this year should be one of investment.

Despite the retail sector being on its knees, there are clearly defensive qualities in books, and with a solid line-up in 2009 we think Bloomsbury is a safe bet. Buy.

William Hill

Our view: Hold

Share price: 225.75p (+18.5p)

Investors fancying a flutter may decide that it is ultimately more prudent to back the bookmaker William Hill's shares than the favourite in the 3.30 at Doncaster. After saying that trading remains resilient in a market update yesterday the stock rose by 8.9 per cent, as buyers also looked favourably on the fact that gross wins in the last 11 weeks were up by 8 per cent. Investors were also clearly impressed by the group's statement saying that full earnings before interest and taxation would be £275m, which was markedly ahead of analyst consensus.

Despite the strong numbers, the experts at Daniel Stewart yesterday cut their 2009 and 2010 forecasts, but say that the stock will trade "on just" 6.2 times 2009 earnings per share.

There is bad news, which might make a punt on William Hill a lame bet. It is an odds-on certainty that more people will lose their jobs in 2009, and this will have an impact on everyone on the high street, including bookmakers.

The particular problem with William Hill is the £1.2bn of debt it needs to refinance by March next year. The group is doing what it can to minimise the impending recession, for instance by moving more of its activities online, but with this amount of debt to be refinanced by banks that are reluctant to lend, the next few months are likely to be uncertain: any resolution to negotiations is also likely to be highly expensive. Most of the analysts are positive on the group, but we would be more cautious. Hold.