Investment Column: Long-term prospects make Tesco a safe haven in these troubled times
Consort Medical; Telford Homes
Nikhil Kumar is The Independent's New York correspondent. He was formerly assistant editor on the foreign desk and has also done a variety of jobs on the city desk, where he wrote about markets, commodities and other business and economics topics.
Friday 02 December 2011
Our view: Buy
Share price: 406p (+0.8p)
Tesco, the world's third-largest retailer, will give the latest reading on the health of the UK grocery sector on Thursday next week, when it releases its third-quarter results. While it operates in 14 countries and has a sprawling services business, much attention will centre on its UK like-for-like sales, excluding fuel and VAT, and particularly the impact of the £500m price campaign launched in September.
Deutsche Bank forecasts that Tesco's like-for-like UK sales will have declined by 0.5 per cent for the 13 weeks to 26 November, a slight improvement on the 0.9 per cent fall in the previous three months. While such a result would leave Tesco's underlying UK sales behind those of Morrisons, the market leader is the antithesis of a one-trick pony.
For instance, Tesco is expected to post strong sales at its loss-making Fresh & Easy business in the US, Turkey, Slovakia and Asia in its third quarter, though Thailand's stellar growth will have been dampened by the floods.
Above all, while the UK still accounts for about two-thirds of its group sales and profits, we urge potential investors to look to the long term.
Most simplistically, we think Tesco is a safe haven in troubled times, as it sells food across the world. On the financials, for a company that is expected to grow profits comfortably above £3.6bn this year, it trades on a relatively modest forward earnings multiple of 12.3. Furthermore, the group's shares are bolstered by a colossal property portfolio worldwide, which includes its commitment to keeping its proportion of freehold sites at above 75 per cent in the UK.
Tesco also has the best operating margin of the big four UK grocers, and the group is on track to increase its return on capital employed to 14.6 per cent by 2015. Finally, the group has a peerless record of growing its dividend for more than a quarter of a century. While its market value may not rocket over the next year, for those seeking long-term share-price, and income, growth, Tesco should be part of an investment shopping basket.
Our view: Buy
Share price: 530p (+32p)
The market was certainly pleased with Consort Medical's update yesterday. The medical-devices firm issued half-yearly figures, which sent its stock up sharply on the day. Revenues in the six months to the end of October were up 5 per cent at nearly £69m, while pre-tax profits were up more than 50 per cent (profits before tax and special items were up 22 per cent).
The group, which maintained its interim dividend at 7p per share, was boosted by strong volumes at its Bespak unit's core respiratory division. Net debt was up, as Consort pressed on with its planned investment activities, but, at 1.3 times earnings before interest, tax, depreciation and amortisation, it remains within the company's borrowing covenants and facilities.
So, not much to fault. Although the economy both here and in many other parts of the world is not doing great, Consort remains confident, which shouldn't come as a surprise given the size and the trends in the broader market for respiratory illnesses.
Not that the company is being complacent; yesterday, it also announced a contract to develop a device that looks like a cigarette and acts as a replacement for nicotine. This is also a growing area, and Consort's efforts in this direction are encouraging.
At just under 11 times forward earnings, with a dividend yield of just under 4 per cent, the stock is also affordable.
Our view: Buy
Share price: 74p (-0.5p)
Regular readers of this column will be aware of our caution when it comes to the UK housing market. While many have been happy to back house builders owing to heavily discounted valuations, we have been more inclined to wait and watch, given the ongoing mortgage famine and the threats to the economy. We agree that the sector has long-term attractions, but worry about the short-term challenges.
As always, however, there are exceptions. Telford Homes, which issued its half-yearly figures yesterday, is different to the bigger house builders in that it is focused on east London.
This gives it some unique attractions. First, it benefits from the general resilience of the London economy relative to the country at large. And second, its focus on the eastern areas, such as Stratford, position it very well ahead of the Olympics.
There are also the advantages brought about by improving transport links and the recent opening of the Westfield shopping centre. All this makes Telford, which upped its interim dividend by 20 per cent after posting healthy revenues and strong sales for the half-year, worth backing. The fact that the shares trade on a hefty discount to net asset values – around 45 per cent, according to Shore Capital – makes this our preferred play in the sector.
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