Investment Column: Weak economy makes it harder for Travis Perkins to build profit

Speedy hire; RWS Holdings

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The Independent Online

Our view: Avoid

Share price: 865P (+64P)

To look at the way the economy has been going it might come as something of a surprise that Travis Perkins has managed to book a 5.9 per cent rise in like-for-like turnover for the nine months to the end of September. The result from the builders' merchant and DIY retailer came despite it having the benefit of one less day of trading in key divisions than in the comparable period last year and was in line with that for the second quarter. It also comes despite the company's aim of maintaining margins.

And it means that the group is winning market share and doing it via the unfashionable (especially in this sector) but effective route of offering its customers good service and high quality product. The question is: can it be maintained?

There is no doubt that the market in which Travis Perkins operates is in decline as the grim economic backdrop hits trading. Its Wickes DIY chain saw a slight (but only slight at 0.5 per cent) contraction in sales but that is accelerating: the figure was 2 per cent in the last 13 weeks. And given the pressures on consumers it is no surprise that much of the pain is concentrated in kitchens and bathrooms. Such big-ticket expenditure is what nervous consumers are shying away from.

That said, the update showed a resilient performance from Travis Perkins. Turning to the shares: we said hold at 1004p on the basis that it should continue to grow market share in February. Our conclusions on the latter have proved correct. But even after some strong gains over the last few days the stock has slipped.

We also have concerns looking forward. There is no question that the valuation of just 9.3 times full-year forecast earnings is undemanding. And it is true that Travis Perkins has been doing remarkably well; it could continue to gain market share, but it will have to work hard to maintain momentum given the pressures on its market.

We would also note that it is not as if there is the compensation of a chunky yield, which stands at a prospective 2.5 per cent for this year, rising to 3 per cent next year. Sentiment in the sector is likely to remain weak as investors worry about the economy. And so, despite the update, we would rather keep away.

Speedy hire

Our view: Hold

Share price: 22.25P (+0.75P)

There was nothing wrong with yesterday's update from Speedy Hire. The tools and equipment for hire business said underlying revenues in its second quarter were expected to be up by 4.1 per cent on the year, helping put the business on track to meet the board's expectations for the full year.

The result is a credit to Speedy's actions to protect itself against the weakness in the wider economy. In the UK, it has been improving its yields by driving up hire rates. This has helped offset lower volumes, which were partly the result of the company "actively turning away unprofitable business".

The company's international division is strong and the balance sheet is stronger after Speedy further trimmed its debt. But despite all this we cannot overlook broader economic trends. Although Speedy appears to be in good shape, it faces risks from its exposure to the domestic construction market, something that was flagged up by the analysts at Peel Hunt yesterday.

But while we share some of those concerns and would not buy, we would highlight that Speedy does not wholly depend on that sector. Moreover, it is cheap, trading on around 10 times forward earnings for next year, falling to under eight times on the estimates for the year after.

RWS Holdings

Our view: Hold

Share price: 434P (+3P)

Shares in RWS Holdings continued their broadly upward trajectory yesterday after the patent services company announced the promotion of Reinhard Ottway to the chief executive's chair.

Mr Ottway, an 18-year veteran at the company who has worked as business development director for the past 10 years, will take over the reins in January, when Liz Lucas retires after 34 years with the group.

It is good to replace one safe pair of hands with a long history at the company with another and the appointment of Mr Ottway should not do anything to disturb rally that has seen the RWS share price jump by about 80 per cent in the past year.

The company occupies a unique niche, acting as a kind of language lawyer, searching for and translating patents so that companies get to protect their products across a range of territories. Clearly, a global downturn can't be good for a company dependent upon innovation for a living.

Still, businesses are putting increasing store on developing and protecting new technologies and not every country is struggling. We decided to buy in when the stock was worth around 400p. It has done well since and may well continue rising. But the risks posed by the economic backdrop mean that we are happy to sit on our holdings for now.