Investment Column: Shop for Dunelm when the shares soften

Dunelin

Our view: Hold for now

Share price: 235p (+24.75p)

Dunelm Group's share price performance over the last year is almost a mirror image of that of most retailers. The out-of-town homeware group has seen its stock gain 80 per cent in the last 12 months as a series of upbeat trading updates and results have made the group the belle of the retail sector.

The group issued its full-year trading update yesterday, saying that like-for-like sales grew at 5 per cent in the 26 weeks to 27 June, while the gross margin was up 120 basis points year on year. The numbers were predictably good, but beat the estimates of most analysts, sending the stock up by 11.8 per cent.

The market seemed happy to hear what it wanted to, however. Yes, the numbers are stellar, and are made to look even more so by the woeful performance of others in the sector, but even the chief executive, Will Adderley, warns that the next 12 months could be tough, especially as consumers are likely to face higher tax bills and bigger mortgage payments.

We like Dunelm and, over the long term, we would be happy buyers. However, yesterday's increase in the share price would persuade us to take profits at this point and wait for a little bit of weakness before coming back in.

We would be concerned that after the share price's meteoric rise over the last 12 months, Dunelm is now on a par with most of its peers, leaving little for new punters to get their teeth into. Analysts at UBS, Dunelm's broker, argue that even though trading on 15 times earnings per share puts the group in line with the rest of the industry, the stock deserves a 20 per cent premium. Mr Adderley says Dunelm is taking market share and has potential to grow.

We are nervous that investors may have missed the boat. Dunelm is a top performer, and hats off to the group for that, but this is not the optimum time to buy the shares. Hold for now.

Cranswick

Our view: Hold for now

Share price: 612.5p (+9p)

Mexican flu, influenza, H1N1 – Martin Davey, chairman of the pork products group Cranswick, will call it anything other than what the rest of the world calls swine flu.

You could be forgiven for assuming that pigs are not the flavour of the month, but judging by Cranswick's first-quarter numbers published yesterday, consumers are rightly not associating the outbreak of swine flu with sausages and spare ribs.

Indeed, Cranswick is flying. Mr Davey says that the last six months are among the strongest the group has ever seen, and while the hot weather of recent weeks has given the company a fillip as people opt for more barbecues, consumers are increasingly recognising the health benefits of pork.

That may be so, but no doubt the group's share price has got investors' blood pressure soaring. The company's impressive trading performance has not yet been reflected in the stock, and Mr Davey says the brokers shrug their shoulders when asked why.

Those at Evolution argue: "Cranswick is a well-managed and highly cash-generative business with attractive fundamentals across the board. The company looks undervalued on 9.3 times 2010 earnings versus the food sector on 12.2 times. We reiterate our buy recommendation and 700p target price."

The stock was up yesterday, but it would appear that investors, for whatever reason, are still not sold on the idea. We like the group, but would wait for the rest of the market to show signs of catching up. Hold for now.



Huntsworth

Our view: Buy

Share price: 57p (unchanged)

"It isn't as bad as we all thought it was going to be," says Lord Chadlington of the recession. In fact, looking at the public relations group Huntsworth's performance over recent months, the great financial meltdown of 2009 has not really materialised.

Lord Chadlington says the group, which includes a number of financial, health and public affairs PR firms, has 75 per cent of expected revenues for next 12 months already booked. As such, and being true to his PR background, Lord Chadlington argues that visibility is what most concerns investors.

It is not that all has been too rosy, and the group does expect full-year profits to be close to, or slightly below, last year. Clients want more for their money and, of course, everyone is keeping an eye on bad debts.

Nonetheless, Huntsworth is doing well despite the recession, and investors cannot ignore the 80 per cent rise in the stock over the last six months. Lord Chadlington reckons that the shares are still undervalued, arguing that the analysts tell him the stock should be closer to the 90p mark.

We reckon this could be wishful thinking, but we are impressed by the group's performance. Buy.

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