Investment Column: Sports Direct's shareholders 1, England 0

Dechra Pharmaceuticals; Greene King
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Our view: Buy

Share price: 117p (+3.5p)

Despite the disappointing efforts by England, Sports Direct said it had a "good World Cup", although its performance could have been even stronger with "better team results".

In fact, there was plenty to recommend in yesterday's first-quarter results posted by the retailer, which is controlled by its deputy executive chairman, Mike Ashley, who also runs Newcastle United football club. Sports Direct delivered a gross profit increase of 17.8 per cent to £185m, on a total sales hike of 8.8 per cent to £408m, for the 13 weeks to 25 July.

A key driver of its profit growth was an uplift of 300 basis points in Sports Direct's gross margin, driven partly by tight stock control heading into the World Cup and healthy margins on associated tournament merchandise. Despite these factors, and Sports Direct's market-leading position, its shares trade on a miserly 2011 price-earnings ratio of 6.7 times – one of the lowest in the retail sector. Some of this discount relates to fears over the impact on Sports Direct of a rise in VAT from January and relapse in consumer spending, although it could be argued that its "pile-'em high, sell 'em cheap" offer may give it a degree of shelter during a renewed downturn on the high street over the coming year. Rather, the main reasons for the discount on Sports Direct's shares are the two ongoing investigations into the retailer's activities, involving the Serious Fraud Office and Office of Fair Trading.

While the retailer is co-operating fully with the inquiries, there remains the prospect of a surprise, such as a hefty fine or worse, further down the line. Brave investors who feel like taking a punt on Sports Direct also need to bear in mind that the colourful Mike Ashley rarely seems too far away from controversy. That said, we feel they are worth the risk, as Sports Direct is forecast to ramp up its dividend and grow pre-tax profits over the next two years ahead of the London Olympics in 2012. Buy.

Dechra Pharmaceuticals

Our view: Buy

Share price: 445p (unchanged)

If ever any evidence was needed to prove that a dog is a man's best friend, look no further than Dechra Pharmaceuticals.

Yes, the economy could be heading back into a double recession; yes, the holiday companies are reporting profits warnings, left, right and centre; and yes, food companies are warning of higher prices; but none of that worries Dechra, the veterinary products group.

Unveiling an 11.9 per cent jump in 2010 profits, the company said that despite concerns about the health of the economy, the outlook is upbeat.

Yet, the confidence notwithstanding, investors have not warmed to Dechra. The shares are barely above the level of 12 months ago, and yesterday's good news actually did nothing at all for the share price.

This could be because the market sees Dechra as a safe-as-houses defensive punt, but such has been the antipathy towards the shares that they are now trading on a very undemanding price to earnings level of 12.7 times, while the yield comes in at a reasonable 2.4 per cent.

On a valuation basis alone, it is hard to ignore Dechra, and we would buy the shares, but don't give the group an indefinite period to get the stock going. Buy.

Greene King

Our view: Hold

Share price: 425.5p (-4p)

While the nation's appetite for a cheeky pint down the local appears to be waning, Greene King has found solace in the fact that a decent menu has made up for much of the decline in sales of booze.

It posted results yesterday showing that during the 18 weeks to 5 September, like-for-like food sales rose 8.6 per cent. Sales of ale across the sector declined 8 per cent in the past quarter. While Greene King's ale business also fell, it outperformed the rest of the market, posting declines of 4.6 per cent in sales of its own-brewed beer.

Yet analysts fear the positive metrics are slowing. The outlook is also muddy, with the group pointing to "a number of significant headwinds". These include the austerity cuts, benefits reform and the impending rise in VAT, which are expected to force a decline in consumer spending.

But management were bullish yesterday, saying it was confident it would snatch larger market share in the coming year and outperform the market.

Evolution Securities' analysts put the stock at a price of 9.5 times estimated full-year earnings. Investors should also look at a healthy 5.3 per cent dividend yield, but the outlook means we are a hold for now.

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