Wait for Hanson to hit the bargain basement

Keep Smith & Nephew on hold; QXL Ricardo remains a risky bid

Tuesday 14 January 2014 04:00
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Amid crumbling stock markets, it has been tempting to put money instead into bricks and mortar. But what about Hanson, the bricks and mortar supplier whose shares have been one of the better performers in the FTSE 100, at least until recently?

On the evidence of yesterday's results, the company is built on solid foundations. Alan Murray, the new chief executive, was able to trumpet a 12 per cent rise in underlying profit, strong cashflows, a rising dividend and reduced debts, all despite a reduction in sales to US industry.

In the first half of the year, pre-tax profit, before one-offs, was £145m on group turnover down 3 per cent to £2.0bn.

About half of Hanson's work is with governments. There were more hiccups and delays with the massive infrastructure spending programme in the US, but that will continue to grow for the rest of the year, and there is talk of boosting it for next year, too. Meanwhile, the Government has also signalled a wave of new road-building and social housing projects that will kick in soon.

The areas of concern – which dominated investors' thoughts yesterday – are that governments may be forced to cut back if tax receipts fall short. About 30 per cent of Hanson's sales are to housebuilders, who may retrench if there is an end to the UK and US house price booms. And if the US really is heading for a "double dip" recession, which will snuff out the early signs of economic recovery, things could get even nastier.

On top of this, there is the impact of the falling dollar, which may accelerate if the US stops being the engine of the world economy. For every five cents the dollar falls against the pound from here, £6m will be wiped off Hanson's profits.

The company's shares have plunged by a quarter in two months on just these concerns but, at 9 times this year's earnings, they haven't reached bargain basement prices, given the risk it will miss forecasts. Those with Hanson shares should hang on, for the company will surely pull through, but new investors may be able to pick up stock more cheaply.

Keep Smith & Nephew on hold

Visitors to the Bodyworlds exhibition of preserved human bodies in London are treated to examples of hip and knee replacements, where giant metal joints have been screwed down into the bones of the patients. It's a startling sight, but Chris O'Donnell, the chief executive of Smith & Nephew, insists that these are old-fashioned joints and the procedures are much neater, smaller, less invasive these days. He should know. His company is one of the world leaders in replacement joints, and it grew sales of artificial hips and knees at 27 per cent in the first half of the year, thanks to smaller, less invasive and sturdier new products.

Smith & Nephew is a good company, having turned itself from a boring manufacturer of sticking plaster to an innovative provider of orthopaedic devices and hi-tech keyhole surgery instruments. Margins are heading towards 20 per cent, in line with the best of the US medical technology sector, although they have stalled this year and it will take until roughly 2005 to finally reach that target.

Pre-exceptional profits in the six months to 29 June were £93.7m, up 13 per cent.

The company has promised double-digit percentage increases in earnings for the next few years, and there is nothing to suggest it will be blown off track, even with the dollar moving against it. Indeed, with an ageing population and governments around the world determined to spend on health, the numbers of hip and knee operations should keep rising. The shares, down 8p to 328p, trade on 21 times this year's earnings, which means the market already assumes it will beat forecasts. Hold.

QXL Ricardo remains a risky bid

Shares in QXL Ricardo have proved harder to shift than a three-legged horse at auction since bidders lost their enthusiasm for dot.coms.

Somehow, it still manages to be early days for QXL's business model, five years after the cyber flea market was set up. It has only recently moved to a pure trading platform, providing the forum to unite buyers and sellers, taking a commission on each sale. Previously, it sold its own goods.

While the number of items it sold jumped by more than one-third in the past three months, turnover remained flat at £1.6m. Tighter cost controls narrowed losses in the quarter to end-June to £4.9m from £10.7m. But with no profits expected before 2004, and cash burn still running at £4m a quarter, QXL's £10m cushion won't last very long.

Mark Zaleski, the chief executive (who shot to fame at Webvan, the US online grocery business that went bust last year), is confident that co-branding deals with the likes of Yahoo! and Manchester United mean QXL can last the distance. But there is little doubt it will have to tap its £11m reserve funding facility, which will dilute the shareholdings of existing investors.

QXL shares, up 0.03p to 0.48p, remain too risky for anyone except day traders.

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