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Weekly share-tip roundup: Buy Marks & Spencer, sell Next

08 April 2016

Questor says recent share price falls make Marks & Spencer attractive, but warned Next’s reliance on credit represents too much of a risk.

By Tony Cross,

Market Analyst, Trustnet Direct

Marks & Spencer rallied this week after releasing a set of results with better than expected figures. The retailer’s shares fell last month after the market turned on peer Next, but the two stocks now look to be heading in opposite directions.

They make up part of this week’s share-tip roundup from Trustnet Direct, which contains a number of other recommendations for investors who want to go “shopping” for stocks. 

 

Tuesday

Mondi – Hold

Hold Mondi, was the message from Questor. The packaging group’s shares came under fire on Monday as news emerged the firm was in the sights of Russian anti-monopoly investigators. However, the decline of the share price was modest and this seems to accurately reflect the risk that the part of the business that’s under scrutiny is relatively small. As such, this looks like little more than a speed bump along the way – the company’s fortunes remain underpinned by a steady stream of sales to consumer giants and the stock should remain a healthy dividend-payer. Now is not the time to panic – this is still a long-term hold.

Sports Direct – Sell

Tempus said investors should continue to avoid Sports Direct. The column cites the poor communication with shareholders as a key reason to be concerned about this stock, which remains 55 per cent owned by Mike Ashley. There’s no dividend – and this is unusual – and the market has shown an unforgiving approach to the recent news of those headwinds hitting the business. The company still has a hefty market share, but the stock now trades on just a 10 times multiple and there’s a risk this could result in Ashley trying to take the company private once again. The column sees investing here as a gamble.

 

Wednesday

AA – Buy/sell

There were mixed messages on AA on Wednesday. Questor said investors should avoid the stock, citing the high risks involved in engineering its way out of a debt mountain. Yes it’s highly cash generative, creating almost £1bn of revenues in the last year and a pre-tax and interest charge profit of £305m, but most of this was swallowed up covering interest repayments. Expensive debt is being paid down and interest charges will be £45m lower this year, but the indebted restructuring doesn’t appeal to the column. 

Tempus took the opposite view, however, calling AA a long term buy. It said despite an ugly earnings report, the road to recovery seems well charted from here. Headline customer numbers may be falling, but average spend is up and although still saddled with debt, these liabilities are falling. The uncovered dividend may also be cause for concern, but this does offer a reasonably attractive 3.7 per cent yield and with the shares trading on 11 times earnings, they certainly don’t look toppy. It seems the hard miles may now have been covered.

 

Thursday

Premier Foods – Buy

Buy Premier Foods, was the message from Tempus. There has been a rather curious bid process going on of late – shareholders have stuck with this company through a very rough few years and just as growth appears to be returning, last month an attempt was made by McCormick of the US to bid for the company at a knock-down price. The wrangling left the chief executive on the back foot and he is now left to explain either what the prospects are for the company – which remains saddled with debt and pension liabilities – or what price is acceptable for the board to start talking. The column admits it’s a speculative play, but the prospect of a higher offer coming in makes this one worth a look.

Next – Sell

Questor said investors should avoid Next. Shares in the company may have fallen by 25 per cent over the last quarter, but that doesn’t make them a buy. The column flagged up the impact of the credit business going into reverse and it seems this is what has driven so much of the company’s success over the years – the share price reaction has been seen despite sales for the year to January being up 3 per cent and pre-tax profits rising by 7 per cent. It is felt that consumers are now suffering fatigue from the credit binge they’ve been on since the turn of the decade. Next has tried to counter this by offering ever more generous credit terms, but what this means is if the economy slows again, bad debts will be higher at precisely the same time as underlying sales take a hit, too. Even at the 13 times multiple the shares currently trade on, the column said the credit risk isn’t properly priced in.

Performance of stocks over 1 month

 

Source: FE Analytics

 

 

Friday

Worldpay – Sell

Tempus warned investors to avoid Worldpay earlier this morning. The company’s shares were rattled yesterday by news of the early exit of two private equity backers, but leaving this aside, the column still isn’t a fan of the payment processing firm. Last month’s results held few surprises, but coming so close to the float, this was no surprise. Organic growth of 10 per cent seems to be feasible, but there was some concern over the state of operations in the US. Earnings are in reverse and the company has noted that turning this around could be rather more expensive than had been thought. With the shares highly rated – 38 times earnings this year, falling to 28 times in 2017, plus a private equity overhang, there’s a lot that can go wrong.

Marks & Spencer – Buy

Buy Marks & Spencer, was the message from Questor. The potential for cost-cutting and the fact that in the short term sales are being constrained by consumer uncertainty appears to be making this a good value stock. The company generates plenty of cash and a major capex program has now been completed which will further help bolster the balance sheet. Debt levels may be a little on the toppy side, but with recent share price falls, the stock now trades on a multiple of just 11 times. At this price, the column sees it as a worthy long-term buy.

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