The Investment Column: Good numbers, but don't get too frothy over Wetherspoon

Thorntons; Best of the Best
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The Independent Online

Our view: Hold

Share price: 193p (+18.25p)

At £4.59, JD Wetherspoon charges less for a burger and a pint than some bars charge for a single drink. Goodness knows what its burgers are made of, but they are certainly popular, with sales in the 11 weeks to 13 July up 0.4 per cent in a market where sales are otherwise in freefall.

In fact, Wetherspoon, which operates at the lower end of the market, has been performing pretty well recently, even if the stock has slipped dramatically from its year highs of 619p. Yesterday's pre-close statement clearly came as an awakening to some investors who had previously put the group in the toxic high-street pile, with the shares rising an impressive 10.4 per cent.

The finance director, Keith Down, says the strong performance, which watchers at Blue Oar say others would give their eye teeth for, is down to more than cheap offers. He says promotions, such as flyers direct to people's homes, has developed a loyal customer base. He also says it is easier for a group like Wetherspoon to pass on higher input costs, given that competitors will still charge higher prices for food and drink after the group has increased its prices.

However, it is difficult to recommend anything that relies on consumer confidence.

In terms of valuation, despite the spike in the stock yesterday, the analysts are fairly happy with where things stand. Those at Merrill Lynch say that their price target of 250p is based on 8.5 times estimated 2009 earnings and a 2009 EV/Ebitda of 8.7 per cent. While this represents a 7 per cent discount to Wetherspoon's peers, "we feel that this discount is warranted as JDW is the most operationally geared pub stock, the most exposed to the smoking ban and has the highest exposure to gaming machines". Hold.


Our view: Sell

Share price: 109p (+2.5p)

In normal circumstances, it would be difficult to argue with the confectionery retailer Thorntons as an investment choice, but argue we will.

The group is performing better than its sector and is undervalued; investors should be able to back it to the hilt and see the stock gradually climb, making them lots of money.

However, they should not buy Thorntons shares. As is well documented, the retail sector is having its worst period for a number of years and, no matter how excellent the group's numbers, the share price will fall. Even the chief executive, Mike Davies, says there is very little he can do aside from keeping the group in check. The company has lost more than 37 per cent of its value in the past year.

In fairness to Mr Davies and his team, you cannot fault the figures. The group reported yesterday that sales were up 16.8 per cent during the 10 weeks to 28 June: he points out he has delivered seven consecutive quarters of growth, despite the horrible markets.

The group's brokers at Dresdner Kleinwort say that, in spite of the country's healthy demand for chocolate, the company's stock has underperformed the market by 21 per cent, and the sector by 8 per cent, in the past three months. Dresdner concedes, however, that the group is "not the cheapest", trading at 11.6 times 2008 earnings versus the sector at 8.8 times.

It is not for that reason that punters should not buy Thorntons. Rather, it is because fundamentally retail sector investors are going to carry on losing money on investments for the foreseeable future, no matter how well individual firms are performing, such is the direction of the market.

The Dresdner watchers have cut their target price from 155p to140p, which the shares last passed on their way down to their present level on 15 May. It would take the news that chocolate has magical healing powers to push Thorntons' share price up above its present level. As such, investors should avoid the stock. Sell.

Best of the Best

Our view: Cautious hold

Share price: 31.5p (-3p)

For most people, Best of the Best represents the best chance we will ever have of owning a car like a Porsche or a Ferrari. This is because the group runs the competitions travellers find at airports where people are invited, usually by a glamorous salesperson, to pay to enter a competition to win one.

In prelims announced yesterday, the company said it had increased turnover by 23.9 per cent to £7.3m, with pre-tax profits up 20.6 per cent.

Despite the good news, the shares have suffered, both from being a small AIM-listed stock and because the group was forced to issue a profits warning in May after having to close its operation in Heathrow's Terminal 3.

The house broker Charles Stanley reckons the share price is capable of getting to 55p, which is maybe a little ambitious given that the shares were down 8.7 per cent yesterday, despite the results.

Best of the Best is so named because it says it offers the best cars, electrical goods and whatever else in its competitions, which it also runs online. Sadly, the shares have not been the best of the best for investors, falling 50 per cent in the past year. Cautious hold.