Investment Column: Wetherspoon shares will lose their fizz

Millennium & Copthorne; United Drug
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The Independent Online

Our view: Hold

Share price: 447.25p (+1.25p)

There is no doubt that pub groups have had it in the neck from investors in the last year or so. Shares in most are down sharply as two consecutive summers of dreadful weather, the smoking ban and falls in consumer spending have hit the industry.

In any period of turmoil, there are always winners, however, and if you want exposure to the pub industry, JD Wetherspoon is probably your nailed-on, copper-bottomed bet. Its stock is up 160 per cent on its year lows of last July, while its heavy marketing spending and the perceived low-cost offering has continued to attract those who have moved downmarket.

The company, which earlier this year was offering pints of bitter for 99p, said yesterday that year-to-date sales are up 1.4 per cent and, despite the heavy marketing investment, the margin is level with this time last year. Like-for-like sales in the quarter to 26 April were up 0.5 per cent.

Investors may feel, on the other hand, that they have enjoyed a good run with the group over the past year and that now is the time to take profits. Certainly those at Blue Oar have their doubts: "The $64,000 question remains – has JDW done enough to justify its 160 per cent rise since its July 2008 lows?" They conclude that it has, and advise clients to buy, arguing that the company is well-placed to "ride out the current storm".

We are not as convinced and, despite agreeing that the company is a solid operator, reckon it is a bit late to enjoy some of the spectacular share price growth. The dividend being suspended for at least the remainder of this year does not help the "buy" case.

The shares are pricey against the rest of the sector, but that is not our concern. We believe the stock deserves a premium rating.

Instead, we would worry that the shares are running out of steam and that it may be prudent to hold on for a little while. Hold.

Millennium & Copthorne

Our view: Buy

Share price: 270.5p (+49.5p)

Sometimes it seems that equity markets make no sense at all. The hotel group Millennium & Copthorne released what at best can be described as a pretty woeful set of first-quarter results yesterday, and the stock was the second biggest climber on the FTSE 250.

How so? Well, if investors are in any way persuaded that the company can improve operationally, now is the time to buy, given the pathetically low rating of the shares. Watchers at Liberum Capital point out that most of its hotels are held as freehold property, and with the shares trading on a price-earnings ratio of eight times, the stock is cheap. "If you want to drive the re- rating of an out-of-favour, highly operationally geared cyclical earnings play, backed by hugely valuable freehold hotels and other assets and investments, and low debt of less than £300m, this is your vehicle."

First-quarter trading was certainly "predictably challenging," said the chairman, Kwek Leng Beng, in the company's statement. We are not sure it was quite that good. Revpar, or revenue per available room, which the hotel industry uses as its key measurement of success, was down 1.9 per cent, adjusted for currency movements, while pre-tax profits, the key indicator for most other industries, was down 50 per cent.

We would normally eschew a group that has had such a bad trading period, but even accounting for yesterday's hefty share price jump, there are still reasons to back the stock. Buy.

United Drug

Our view: Buy

Share price: 187.75p (-2.5p)

It was a mixed bag of an interim results announcement from the Irish pharmaceutical supplier United Drug yesterday, which all culminated in the group reaffirming that it is still set to hit full-year profit targets.

Shareholders have enjoyed a good run in the last month with the stock up 36 per cent before yesterday's announcement that, in constant currency terms, revenues were up 6 per cent. That number does not explain how the company has faced "significant headwinds", according to its chief executive, Liam Fitzgerald: the fall of sterling against the euro has cost the group €3m and the economic situation has also taken its toll. Earnings per share were down 12 per cent in the period.

Mr Fitzgerald is not a worried man, however. While he agrees there is little he can do about the economic situation, or sterling, the group will see the benefit of €10m of cost savings in the second half. The balance sheet is in good order and gearing at 68 per cent is comfortable, he says. The analysts are generally in agreement that the full-year targets are manageable and the share price, especially given yesterday's sell-off, is undemanding. Buy.