Expectations remain too high at EMI

Greene King; Aston Villa

From Hero to zero in less than a year. Mariah Carey's banishment from the EMI family of recording artists yesterday, when the company paid her £20m not to make any more albums, shows how fickle the music industry and the listening public has become.

The longevity of stars' public appeal appears to have been shortening, just as the cost of marketing new artists has spiralled. At the same time, sales of recorded music have waned, with the rise of TV music channels and, latterly, internet piracy among a host of explanations sought by pop psychologists.

It has been a grim few years for the record labels, and in particular EMI. Robbie Williams, its most impressive UK act, has made no headway in the US market, a failure that mirrors EMI's wider disappointments across the Atlantic. Its disastrous attempts to build scale by merging with BMG or Warner were stepped on by regulators.

So why are the shares up 50 per cent since September, and does the rally presage a genuine reversal of fortunes? The answer to both questions is Alain Levy. The Frenchman, now head of recorded music at EMI, is credited with turning around Polygram, the world's largest record company. The market reckons he can slash costs, conjure up new superstars and restore profit growth. There is no longer room in the share price for disappointment.

He has already set to work cutting out some of the management and back office overlaps between EMI's collection of record labels. The current forecast of a £100m restructuring charge is certain to rise. The market is already expecting Mr Levy to exceed his target of £65m in annual cost savings, and the shares now price in upgrades to underlying earnings growth.

But the market's focus will soon return to the longer-term and prospects for sales growth. The redundancies of a few executives and ex-superstars does nothing for the top-line. Hopes of a bid or some sort of securitisation of revenues from EMI's back catalogue are not enough to justify yesterday's share price of 340p. Sell.

Greene King

Another regal performance from Greene King left the group polishing its crown and adjusting its position on the regional brewing throne. Although second in size to its rival Wolverhampton & Dudley, the Suffolk-based Greene King has emerged as the sharpest of Britain's regional brewers. It prides itself on its unfashionable belief that it makes sense to run pubs in out-of-town locations while still brewing traditional ales such as Ruddles and Old Speckled Hen. And why not, when it works so well?

Under the leadership of the chief executive Tim Bridges, Greene King commands City respect for its stellar track record. It has clocked up six successive years of double-digit earnings and dividend growth, helping its shares to more than double in the last two years.

Like-for-like sales, reported yesterday for the first 36 weeks of its financial year, depict a rising trend across its three divisions. Sales in pubs managed centrally rose 3.3 per cent, while those let out to landlords saw growth of 4.9 per cent. Volume sales in own-brewed ales increased by 4.6 per cent, reflecting the strength of Old Speckled Hen, up 25 per cent. It seems that its portfolio of rural pubs offering good quality food suits the whims of an ageing population.

Greene King has been quick to bed down last September's £103m purchase of Old English Inns and will net £2m in savings next year. It is making progress in raising Old English's profit margins towards its own 18 per cent average. With £150m to spend on further acquisitions, analysts note that Eldridge Pope, the West Country pub operator, would provide a neat fit. Either that, or investors should expect a share buy-back.

The shares, down 4.5p to 726.5p, trade on a price-earnings ratio of 10. That is low by historic standards (it has sometimes enjoyed a p/e of 15) and predicted earnings growth of 8 per cent should provide further upside. Furthermore, Greene King owns almost all its freeholds, adding to its defensive qualities. Keep supping.

Aston Villa

Aston Villa is a mid-table kind of football club share. The company had no debts at the end of November, and is therefore in no danger of going down to QPR-style financial ruin. But it is missing the superstar players of a Manchester United to give it a serious shot at European glory. Consequently, its stock market performance has provided little but heartache.

Results – financial ones – yesterday underscored the problem. It lost £1.4m in the six months to 30 November as player wages again outstripped income. The loss was smaller than last year, as the group increased match attendances and got more money from corporate hospitality.

The club is about to tap its bank overdraft for a new academy, so Doug Ellis, the chairman, had better be right in predicting clubs can work together to cap wages. The fans may yet put the kibosh on such hopes, of course, and the stock headed down 2.5p to 158p despite Mr Ellis's optimism. The stock is for hardened gamblers only, and even they may prefer the newly-untaxed football pools.