Investment Column: M&S is facing strong headwinds – so sell

Intertek; Brightside
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The Independent Online

Our view: Sell

Share price: 377.9p (+6p)

When Marc Bolland takes the helm at Marks & Spencer early in May, he will be joining a retailer heading in the right direction. Tomorrow, M&S is expected to deliver a 1.7 per cent increase in UK like-for-like sales for the quarter to 27 March, driven partly by the robust trade in winter clothing, boots and thermals during the prolonged cold snap. This should be the fifth consecutive quarter of improving underlying sales at M&S.

Consensus City forecasts point to the high-street giant posting full-year pre-tax profits of £637.7m for 2009-10 – an improvement of 6 per cent on last year's figure. However, there are areas of concern that potential investors may want to chew over before putting M&S in their shopping basket.

A key issue is that Mr Bolland is unlikely to unveil the findings of his business review until later in the year, which would suggest that any significant benefits from him will not be felt until the middle of 2011 at the earliest.

This comes at a time when headwinds are getting stronger. M&S's food and general merchandise (largely clothing) sales are both likely to run into difficulties from the next Government's measures to cut the public- sector deficit. This could well hit consumer confidence, causing people to reign in spending while looking for cheaper alternatives to M&S.

Furthermore, while the City may have to wait until its full-year results in May, M&S is poised to report the results of its triennial actuarial pension deficit, which could be as high as £1.6bn. Merrill Lynch estimates this could lead to additional cash payments of between £75m and £80m each year for a decade.

We argued that investors should hold M&S at 369p in September, but feel the outlook for the high street has deteriorated since then. Furthermore, M&S shares trade on a 2011 multiple of 12.3 times forecast earnings, which is marginally ahead of the sector average, as well as rivals Next and Debenhams. Given all this, we believe investors should look at M&S again next year when the consumer picture is clearer and we know what sort of revolution Mr Bolland may be planning, so sell.

Intertek

Our view: Buy

Share price: 1520p (+24p)

Intertek tests the quality and safety of products for numerous companies across a range of sectors. As you might imagine, new rules and regulations, though a headache for some, are a plus for Intertek. The company's recent full-year results, for instance, highlighted the boost to its consumer goods division from the surge in the volume of children's products which required testing to comply with the US Consumer Product Safety Improvement Act.

But that is only half the story. In the absence of new rules, Intertek, which yesterday announced the acquisition of a safety-testing business from BASF, offers some promising leverage to the ups and downs in the wider economy. The US consumer exerts a particularly strong influence, according to analysts. This means that the recent raft of upbeat economic data, with manufacturing indices ticking up and US jobless figures – though a touch weaker than some expected – showing signs of stability, augurs well for Intertek's investment case.

The valuation is also supportive, with Intertek trading on an affordable multiple of 14.1 times forecasts for 2010, according to Jefferies. That dips to 12.4 times on the estimates for 2011. And if that wasn't enough, for those of speculative disposition, there are the perennial rumours of bid interest from a Swiss rival, SGS. The chatter should limit losses in times of weakness. We say buy.

Brightside

Our view: Buy

Share price: 26p (+0.5p)

Motorists of all persuasions are being hit by the triple whammy of record fuel prices, rising tax and insurance premiums. To limit the impact of the latter, customers are shopping around a lot more and are therefore willing to try new distributors.

This is good news for a young(ish), fast-growing broker like Brightside, which yesterday reported a near-50 per cent rise in pre-tax profits to £6.6m on turnover up 35 per cent at £45m. The figures were expected (and priced in to the shares) but Brightside was also upbeat about the outlook, with 35,000 policies written in January, against 31,000 the previous year, a trend which has continued through February and March.

With premiums high, so are commissions, which will support earnings and a drive into new areas, such as offering execution only life insurance products. Unfortunately, the shares are not that cheap, trading on 15.7 times forecast earnings for 2010. That said, Brightside has the wind in its sails at the moment and this should reward those who keep a few of the shares around as a result. Buy.

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