The Investment Column: InterContinental falters but no need to check out yet

Domino's Pizza; Morgan Crucible
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The Independent Online

Our view: Hold

Share price: 828p (+57p)

InterContinental Hotels owns or leases more than 3,900 hotels around the world, taking in internationally recognised brands such as Crowne Plaza and Holiday Inn.

The global scale of the business leaves it well placed to gauge shifts in discretionary spending – that which is not essential and is the earliest to suffer when times become difficult. So it is no surprise that the shares have fallen sharply during the last year, in line with the darkening mood in the United States.

The group says that during the final quarter of last year, its key measure of profitability – revenue per available room – suffered what it terms as a marginal softening as occupancy levels eased in its US hotels.

The decline is not critical, and for now can probably be managed by targeted marketing to fill the vacancies with special offers. But the US accounts for 69 per cent of total profits, and any marked deterioration could be the signal for a further sell-off in the shares.

For now, there is general relief that the group is managing the changed economic environment, reflected in a 7.3 per cent rise in the price, making the shares the largest riser in the FTSE 100.

Full-year profits came in 18 per cent higher at £237m, close to analysts' estimates. The group's aggressive roll-out of new rooms continued, with the addition of 28,848, taking the total to 585,094. A further 225,000 are in the pipeline.

Overall, the number of rooms increased by 5 per cent, while revenue per room went up 7 per cent. The group relaunched Holiday Inn, and is preparing to spend £50m rolling out its Hotel Indigo boutique brand in Europe and Asia. First launched in the US in 2004, there are now 11 hotels in the mini-chain, with a further 52 planned.

InterContinental still has £100m to spend on share buybacks from an earlier programme. Since 2004 it has bought back £3.5bn of its shares.

The company continues to attract faint bid support. The Barclay brothers, who own the Ritz, hold 10.15 per cent. At 15 times expected earnings the shares look reasonably priced, given the uncertain climate in which it trades. Hold.

Domino's Pizza

Our view: Buy

Share price: 215.5p (-6p)

Restaurants have been waving profit warnings instead of menus at the stock market. The credit crunch has led to a sharp slump in takings. No such worries for Domino's Pizza. Stay-at-homes have been topping up on specials such as Meteor, the classic Pepperoni Passion, and the rugby-themed Scrummy. Profits have rocketed, store openings are accelerating, and the shares are due to be promoted to the main market.

It hasn't been easy going. There have been hefty rises in key ingredients such as milk and wheat. Cheese has gone up 50 per cent. But Domino's has found no problem passing the cost on. Prices have gone up 4 per cent with little resistance – no wonder the dearest pizza now costs £16.

Domino's, with 500 outlets, finished the year with profits of £18.7m, up 33 per cent. Takings increased nearly a quarter, to £296m. Shareholders get their rewards with a 43 per cent hike in the dividends.

The company sees scope for another 500 outlets. That looks easily attainable. There is no problem finding sites, which tend to be away from expensive high streets and encounter little objection from planners.

Current trading in the first six weeks is strong, with like-for-like sales up 11 per cent. The migration to internet ordering, which tends to be of higher value, is gathering pace, and now accounts for 21 per cent of all sales.

The company should make profits of nearly £22m in 2008, putting the shares on an earnings multiple of 22. Domino's has consistently delivered. Buy.

Morgan Crucible

Our view: Attractive

Share price: 213p (+16.5p)

Morgan Crucible, the specialist materials group, is reaping the benefit of switching from cyclical customers in the motor, consumer goods and telecom sectors to higher growth markets such as aerospace, defence and petrochemicals. Despite spooking the market in December with an overly cautious view of prospects, it has delivered full-year profits well up with forecasts. Pre-tax profits rose 43 per cent to £71m, helped by a sharp lift from 8.1 per cent to 11.2 per cent in operating margins. It is on track to meet targets of mid-teen margins by the end of 2009. Sales rose 6.3 per cent to nearly £700m.

The order book is strong, up 6 per cent, and the company is well placed to pass on increases in input prices. All three divisions are in good shape. Carbon achieved growth of 6.3 per cent, with margins rising to 16 per cent. Insulating ceramics, the largest business with sales of £291m, grew by 11 per cent, with margins of 12.1 per cent, while technical ceramics grew by 13 per cent, on the back of a strong performance in Europe.

Morgan is now much less cyclically exposed than in the past. The promise of more bolt-on acquisitions, share buybacks and continued strong dividend growth leaves the shares looking attractive at 9 times 2008 forecasts.

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