Investment Column: Game will suffer as economy turns down

Greene King; Park Group


Our view: Sell

Share price: 145p (-5.25p)

It is almost inconceivable to think that sales of video games will not fall in the coming months, notwithstanding the fact that Christmas should provide some respite.

Computer game sales are in every way discretionary, and as more people join the dole queue, companies like the games retailer Game Group will suffer a slowdown. The group issued a market update yesterday confirming that while sales were growing – the like-for-likes in the 44 weeks to 29 November were up an impressive 11.2 per cent – they were doing so at a reduced rate.

In some respects, investors can take solace from a number of factors. Game is the biggest such group in Europe and the fact that its number one rival in the UK, Woolworths, is in administration, can only help. The past month has been kind to Game investors, with the stock rising by nearly 16 per cent before yesterday's numbers. Indeed, the group has lost just 18 per cent of its value in the past year and that is a creditable performance in anybody's book.

Things are going to get tougher, however, and for Game, with no new consoles expected to be launched in the next year, there is not an automatic sales boost. Several analysts yesterday adjusted down their earnings expectations or cut their recommendations. Those at Altium said that, despite strong year-on-year growth, clients should now sell the stock: "In all likelihood, we think that like-for-like sales are currently neutral at best and as a result think the video gaming market has peaked. We have cut our target price to 130p [from 140p]."

Watchers at Seymour Pierce were kinder saying that, trading at 5.8 times 2008/09 earnings, the shares are not expensive and investors should buy.

We find it difficult to believe that, as the real economy begins to feel the heat, retailers like Game will not suffer. Game is a good company, but the economy is turning against it. Sell.

Greene King

Our view: Sell

Share price: 371.5p (-12p)

Rooney Anand, the chief executive of the pub and brewery group Greene King, said when revealing the group's interim numbers yesterday that the "results cover one of the toughest trading periods for many years." The figures included a fall in adjusted earnings per share of 4.5 per cent.

It would not be so bad were it not for the fact that, sadly for Mr Anand, things are likely to get tougher before they get better, which will put the group's future numbers under further pressure. Greene King's shares fell 3.2 per cent yesterday, adding to their 53 per cent decline over the past 12 months.

However, while it is tricky to find something good about the sector as a whole, if it is pubs you want, Greene King might just be worth a punt. While peers are routinely slashing their dividends, Greene King said it has the cash to maintain its payments to investors at last year's level of 7.3p. Furthermore, according to analysts at Numis, "our target price of 440p equates to 8.3 times enterprise value to Ebitda – the freehold pub peer group average – to reflect increased equity risk and weak market prospects. Given its superior market positioning and minimal financial risk, we believe Greene King is more attractive than its large pub company peers".

On the other hand, we would find it hard to back a group that is seeing falling profits in a weak sector and in an economy likely to be in recession for much of next year. Yes, if you have an affinity for the pub sector, we would recommend a buy, but for those who see better punts elsewhere (and there are), backing Greene King now would not be wise. Sell.

Park Group

Our view: Buy

Share price: 15p (+1p)

Look away now, kids. The harsh reality, typically learned at about the age of 10, is that Father Christmas is fictional. The even harsher reality that hits you a few years later is the festive season is expensive, especially if you become responsible for those who still believe the myth.

Park Group, the Christmas savings company, reckons it is a pretty decent bet in these woeful markets. Park takes deposits from those wanting to put a little aside each week for Christmas spending, and it thinks it could be set to boom next year. A move to internet accounts and a growing voucher sales business will help, the company says.

While public relations people claim lots of companies are "recession-resilient", fewer are, in fact. Park has a genuine claim: not many AIM-listed stocks have seen shares increase by more than 10 per cent in the past month. The group has no debt and plenty of cash, and analysts at Teathers argue there is still value in the stock: "With a calendarised earnings per share of 2.99p, the prospective price earnings ratio of 4.7 times is hardly demanding, while the 2009 forecast dividend yield of 9.4 per cent, with the dividend not seen to be under threat, is attractive... our price target of 31p gives upside potential of [more than] 120 per cent." Buy.

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