THE INVESTMENT COLUMN: Hold on to Caffe Nero for yet more growth

Stephen Foley
Friday 04 February 2005 01:02

SHARES IN Caffe Nero, the coffee shop chain, have got up a head of steam, and yesterday hit a high of 135.5p on news that its cappuccino machines had been running at record levels during the six months to 30 November.

The group is achieving phenomenal growth from new stores, reporting an 118 per cent leap in pre-tax profits. With low central overheads and cheap regional management, it can open new outlets without much additional expense and its takings are high enough to finance expansion from internal cash flow. Price increases have outstripped increased utility bills and minimum wage costs, and while shoppers were cautious on Christmas spending, they were still willing to splash out for their lattes.

Caffe Nero wants to double in size to 400 shops and says the market for branded coffee shop chains shows no sign of slowing (the current rate of sales growth is 12 per cent a year). Starbucks, Costa and Caffe Nero control 60 per cent of the market, so there is scope to continue taking business from independents.

We recommended the shares at 98.5p, but at current levels they trade at a scalding 27 times earnings. It may be too late for new investors, but existing holders should stay in.

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