The Investment Column: Signet faces double whammy as gold soars on up

Entertainment Rights; Prezzo
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The Independent Online

Our view: Sell

Share price: 67p (+5.5p)

Lots of companies are complaining about the effects of the credit crunch. But for jewellery group Signet, which owns H Samuel and Ernest Jones, the situation is especially worrying.

The company, which has operations in both the UK and the United States, is facing a double whammy. The price of gold has risen 30 per cent year-on-year for the last two years, which has hit the company pretty hard; spending on gold represents about 25 per cent of the company's global costs. And just when Signet would be looking to pass on these costs to its customers, their confidence is dropping off the scale.

Annual results announced yesterday reflect this problem. Pre-tax profits sank 16.8 per cent to $222m (£112m). According to the company's chief executive Terry Burman, the UK is performing better than the US business, but the company can do little about the macro economy. "We will continue to support the businesses, but the marketplace will shift; what we have to do in this sort of environment is to stay consistent."

Whether staying consistent is good enough for investors is debatable. Burman concedes that, "the outlook remains very challenging on both sides of the Atlantic," and buyers should question whether they need exposure to the sector. There is no doubt the Signet is a good company. Despite the economic woes, it has managed to increase sales in the UK, but it could be some time before the group is performing well again.

Burman points out the company will be in a good position when the economy turns, which is probably true. But that could be some way off and by which time the group may have finalised its rather vague plans to switch its main listing to New York anyway. Buyers beware. Sell.

Entertainment Rights

Our view: Buy

Share price: 10p (-50p)

For a company that owns the rights to Postman Pat, delivery is everything.

The group specialises in owning the intellectual property rights in the children's and family media market, with a stable that includes Santa Claus, Basil Brush and Barbie.

The group, which published its annual results yesterday, makes its cash by allowing others to use the characters in their programmes and merchandise. Some of the numbers look very good with revenues up 129 per cent to £68.1m; others were a little more disappointing with pre-tax profits up a more conservative 1 per cent at £7.9m.

A mitigating factor on the numbers may be the third-party manufacturing and distribution problems the group suffered in the run-up to its busiest Christmas period. New chief executive Nick Phillips says the problems were out of the company's control, but that they are resolved now anyway, he says.

The numbers also benefited from the acquisition and integration of the group's US rival Classic Media, which chairman Ray Bransgrove says has now, "delivered the expected synergies."

In the company's statement realised with the results, the board warns that, "due to the current volatility in financial markets and the economic outlook for the US economy, the board remains cautious in its outlook." And even though the company then goes on to say how it will build on last year, the statement may be a little too pessimistic. The group has rights to 3600 hours of programmes and has operations in 170 countries, and has demand in the world's booming Asian economies.

If investors do want to the buy the stock, they should move quickly. The group has said that it has started preliminary discussions with potential suitors. If interest does develop into a serious offer, those holding shares should make a pretty profit. Buy.


Our view: Hold

Share price: 39.75p (-0.50p)

Prezzo, the pizza restaurant group has been making hay while the sun has shone by opening a raft of new restaurants. This has been as wise move by the group as the restaurant industry seems to have escaped the worst of the financial turmoil hitherto largely unscathed.

The company, which says it specialises in smaller market town sites, has already opened five new eateries this year and expects to have another 20 in operation by the end of 2008.

This growth will undoubtedly help revenues. The chain opened 32 new sites in 2007, which contributed to a 29 per cent increase in revenues to £70.1m. Adjusted pre-tax profits were £10.6m.

A number of independent analysts recommended a buy for the stock, with most saying that a target price of 60p should be within reach. This depends on how the economy performs over the next year. Any severe downturn will not be good for the group. Even the group's finance director Alan Millar concedes that "life is a bit tougher".

The company thinks its shares are, "ridiculously undervalued," and the fact that the share price is at a 12 month low is, "totally unjustified". This may well be true, but the group will not helped by more gloomy economic news. Hold.