Smaller Companies: No magic carpet ride

Click to follow
The Independent Online
The UK carpet business can look like something of a conundrum at first glance, writes Richard Phillips. Two retailers - Carpetright and Allied Carpets - between them account for 45 per cent of the market and are strong, but others are less so.

Shares in the big two have performed exceptionally well. Carpetright has risen 200 per cent over the last four years, while Allied, at 215p two years ago, is now 246.5p. Both went through a rough patch following weakness reported by MFI, but have since been on the mend.

But it's not quite all sweetness and light on the manufacturing side. Investing in carpet manufacturing has often been a one-way ticket to losing your shirt.

Stoddard Sekers International is a fine example. From a peak of 121p in the heady days of 1987, just before the stock market crash, the shares have slithered and stumbled all the way down to 19p. Most investors view them as an income stock, but few have any expectations of real growth to come, though there is always the chance of a takeover.

Even so, there are strong arguments to suggest that Stoddard may come through with some stronger growth in the next few years. Its record over the past five years has been fairly dismal; last year, it made profits of pounds 700,000 on sales of pounds 55m. This was better than the year before when sales were pounds 55.1m, but pre-tax losses came in at pounds 2.3m.

In 1992 sales were pounds 46m, and profits were pounds 3.3m - since when it has been gradually downhill. But there are several factors in Stoddard Sekers' favour at present. It has finished a major re-organisation, at a cost of pounds 2.5m taken in the year to March 1996. The most recent figures were boosted by pounds 600,000 in cost savings, and further improvements can be expected. Manufacturing is now at two sites, in Kilmarnock and Elderslie, down from four. A further pick-up will come with the end to disruption in production quality and volumes.

Finally, there is the state of the carpet market. The consumer boom is sure to bring better demand and improved margins. Stoddard says the improvement is greatest at the top end of the market - it makes Axminster and Wilton carpets - which accounts for 60 per of its sales.

House broker Greig Middleton forecasts profits of pounds 2.3m for next year, rising to pounds 3m in 1999. If that transpires, the shares offer good value, trading on just 6.6 times next year's earnings and 5.8 times 1999 earnings.

Is the business an attractive long-term play? On its track record, it is hard to justify owning the shares long term. As Warren Buffett said, if you aren't willing to own a share for 10 years, don't own it for 10 minutes. But there could be hidden value, making the shares attractive for in-and-out operators. Copyright: IOS & Bloomberg