Investment Column: Debenhams stock is too cheap to ignore

Wellstream Holdings; James Fisher and Sons


Our view: Buy

Share price: 69.95p (-1.05p)

Debenhams brought the Principles brand back from the dead last year – after it had collapsed under a rival's watch – and yesterday proved there is plenty of life left in the old brand yet.

As part of a resilient overall performance, the 158 department store chain touted a strong launch of its Principles fashion range designed by Ben de Lisi earlier this month, which contributed to "double digit" growth at its Designers at Debenhams range over the half year to 27 February.

Granted, Debenhams' wider underlying sales growth of 0.3 per cent over the half year was subdued, but the figure would have been about 1.5 per cent higher without the massive shift to its own-bought products in the fourth quarter of last year. The allocation of more floor space to its own-bought ranges, such as Designers at Debenhams and Mantaray, and tight control of its stock, helped to boost the total sales and gross margin over the half year.

As a result, it boasted that its underlying earnings and pre-tax profit for the half year are expected to be above last year. Citing the closely watched Kantar Worldpanel data, Debenhams also said it had increased its market share in menswear, childrenswear and homewares over the 24 weeks to 31 January 2010.

Of course, some storm clouds are gathering on the horizon for the high street with growing public sector unemployment, post-election tax rises and rising petrol prices all expected to rise. As such many retailers have forecast a tough second half of the year that could last well into 2011.

Despite this, Debenhams sees potential to grow beyond 200 stores on home soil, and its shares – which have fallen from a 12-month high of nearly £1 – now look good value, trading on a 2010 price to earnings ratio of 9.4 times, which represents a substantial discount to the sector average of between 13 and 14 times.

We are not tipping Debenhams to set the world alight, but do think that, like the reborn Principles brand, it has legs. Buy.

Wellstream Holdings

Our view: Hold

Share price: 525p (-10p)

The last time we visited Wellstream, our call was coloured by the state of the order backlog.

The oil pipeline company's focus on costs, market chatter regarding the potential of a bid and an undemanding valuation discounted a sell stance, but uncertainty about the timing of awards outside Brazil, where Wellstream has an agreement with Petrobras, meant that we held back from wading in.

Yesterday, the analysts at Evolution, weighing on the back of the group's results for last year, echoed our call, saying that "outlook for new orders outside Brazil is the key driver". The backlog currently stands at around £168m, and as Evolution points out, that looks "light" compared to full-year revenue forecasts.

For its part, the company said that though there was "evidence of an improvement in market activity" outside Brazil, "the board's near term outlook remains unchanged". This caution is sensible, and reinforces our confidence in the group.

So, once again, the question is not really whether Wellstream is a good company, or whether it is run properly. We think it does well on both counts. It's about the timing of orders. We're content to hold until we see some demand flowing in.

James Fisher and Sons

Our view: Buy

Share price: 403p (-17p)

Sometimes investors are very difficult to please. James Fisher and Sons, the marine services group, yesterday reported a 5 per cent rise in 2009 profits, said that trading was in line with expectations and even raised the dividend by 2 per cent to a total of 13.6p.

And what happens? The shares fall by 4 per cent, continuing a trend which has seen the company lose more than 10 per cent of its value in the last six months, just as equity markets were said to be improving.

The reason for the dip is the disappointing performance from the group's marine oil division, which trailed in with a loss of £1.6m, against a profit of £5.4m in 2008. This meant that the group missed a number of analysts' targets, and hence the share price drop.

We call on investors to grow a backbone. The group as a whole is performing well, and trading on a 2010 price-earnings ratio, the shares are well below historic levels. The dividend yield of more than 3.5 per cent is also a draw.

Ostensibly, James Fisher is a good bet. Fill your boots now while the stock is cheap. Buy.

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