Some of this week’s shares: Carluccio’s and DMGT
Posted on January 21, 2009 by Richard Beddard
Filed Under Companies |
Two stocks in the buy-zone
Here’s part one*1 of this week’s lightning review of companies that have:
- recently published their annual reports,
- long, profitable records, and…
- relatively low share prices in relation to those profits
Carluccio’s (CARL)
To get a flavour of Carluccio’s watch iBall, last June it took a playful look at the restaurant-cum-deli chain last June. Unfortunately for shareholders, its share price has more than halved since then, and it had already fallen from its high a year earlier.
In 2006, it looked like a proper growth stock, but while it may still be growing in terms of stores, it was marginally less profitable in 2008, than it was in 2007. Still it has no debt, is funding new stores from cash flow, and it’s annual report looks so good I could eat it*2.
The dramatic fall in the share price puts me in a quandary. By selling imported Italian groceries at its restaurants, it’s making money all day, and since most of its stores are in London there’s scope for expansion. Maybe this is just a temporary hiatus.
Its price to six-year earnings ratio is about 13 though, and although that’s a fair price to pay for a growth stock, I think that could come down if it spends more than a year in the doldrums. I like the idea of investing in Carluccio’s but think the price, if not the food, is still a bit rich.
Daily Mail and General Trust (DMGT)
DMGT falls into that category of companies I’d like if only it wasn’t so indebted. It has £1,000m in debt, which puts gearing well above 100%. Perhaps investors can reconcile themselves to such high levels of debt because DMGT is among the bluest of blue chip shares.
I remember calling DMGT’s financial director a couple of years ago to find out when it had last cut the dividend. The answer was somewhere between ‘never’ and the Second World War. It may even have raised the dividend every year since then. This time the dividend is up a modest 2% and it would surely be a huge statement, should the DMGT board ever cut it.
Perhaps that explains why the price has settled where it has, such that the dividend yields just under 6%. Investors cannot believe DMGT would cut.
Based on its dividend and earning power, DMGT’s right in the buy-zone. The share price is nine times average earnings over the last nine years, which is cheap for a company with its pedigree. But there is a problem, apart from the debt. Its record of earnings (which fund the dividend) may not be that relevant.
The company built its reputation and profitability on its national and regional newspapers*3 but, in common with the rest of the industry, those titles are in a state of managed decline. DMGT is focusing investment on its other businesses, exhibitions and business information. The company boasts that its non-newspaper business has risen from 14% of operating profits to 62% in the last twelve years.
That’s good, but it also means DMGT is a different company to the blue chip of previous decades.
Footnotes:
- Tomorrow: EasyJet, Intec and Ransom.
- It sounds good too. Which would you eat first: The Rendiconto finanziario (cash flow statement) or the Conto Economico (Income statement)?
- I loathe the Daily Mail, but its revamped website surprised me. It brilliantly juxtaposes fear-laden headlines with “Debbie looks better than Madonna, says Paul Daniels”. Much as I intend to click on “Brown told he’s lost markets’ confidence as bank shares sink again”, I find a trivia tractor beam drawing me to: “The Stig(s) unmasked: Now Top Gear admits it employs FOUR drivers.”
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