Evening Fool

Tuesday, 19 May 1998

Market Close
FTSE 100  5877.8  +51.6  (+0.88%) 

Marks & Spencer Results
The retailer looks to expand.

Compass Group, oft seen as a bid target of support services giant Rentokil Initial, jumped 25p to 1140p after reporting a stellar set of interim results. Turnover was up 17%, pre tax profit was up 20%, and earnings per share (EPS) increased by 13% to 14.6p. The company is in debt to the tune of £848m, as it has funded an acquisition spree in the last couple of years. Pre tax profits before interest were £96.2m, and the interest payable was £30.2m, giving Compass lowly interest cover of just over 3 times. This puts them in the bottom 10% of FTSE 100 companies by that measure. The company denied that they had received any bid approach from Rentokil Initial.

British Energy surged 18p to 563p after the power company announced that EPS rose to 18.1p from 5.1p in the same period last year. The company also announced a special "supplementary" dividend of 10p to go along with their first covered annual dividend of 14.7p per share, up 7%.

Enterprise Inns frothed up 5p to 367p after the pub group announced adjusted EPS of 11.7p, up almost 16% over the corresponding 1997 first half period. Full year EPS estimates are for the company to earn 24.8p per share, which leaves Enterprise on a forward price to earnings ratio (P/E) under 15. This is at a significant discount to some of the highflyers in the Breweries, Pubs and Restaurant sector.

The banking shares were back in favour today after their recent bout of stage fright. Leading the way upward was Lloyds TSB 31p to 864p, Halifax 32p to 824p, and sector bad boy Northern Rock 10p to 558p.

Shares in high street retailer Next had a belated jump of 34p to 521p today after the company's annual general meeting statement was released to the stock exchange. The company said that in the 15 weeks since February 1998, sales are now 0.5% above the previous year. That represents a small improvement on their announcement, which coincided with a profits warning in March. The market was obviously collectively breathing a sigh of relief that the financial health of their former darling was not deteriorating further.

Supermarket group J Sainsbury popped up 35p to 516p after announcing the planned sale of its stake in the US's Giant Food business for over US$600m to Dutch group Ahold.

Vanquished

Retail bellwether and recent Qualiport addition Marks & Spencer today announced full year results for the year ended March 1998. Group sales rose by 5.1% to £8.2 billion, but normal pre tax profit was up only 1.2% at £1.1 billion. This translated into normalised EPS of 27.8p, giving growth by that measure of 4.1%. EPS growth was larger than pre tax profit growth largely as a result of the reduced corporation tax rate. These figures were, if anything, at the lower end of expectations, and the shares responded by falling 4p to 576p.

Despite widely expected uninspiring growth numbers, the company continues to press forward in its unprecedented expansion and investment programme. The Chairman Sir Richard Greenbury said that the major capital and revenue expenditure will generate significant sales growth and profits in the years ahead. The investments will affect the company's results in the short term, but he is confident that M&S will reap the rewards from 1999/2000 onwards. Sir Richard sees the fact that the company increased their full year dividend by 10% despite going into debt to fund the expansion programme as a sign of confidence in their long term prospects.

(We interrupt transmission of tonight's Daily Fool for a quick trip to the Fool's School. There is a big accounting difference between capital expenditure and revenue expenditure. An amount of money is considered capital expenditure when it is spent on assets that are not normally held for resale but are for the purpose of earning revenue. An example would be a large piece of machinery that is used to produce millions of units of product over a long period of time. This capital expenditure goes onto the company's balance sheet as an asset, and a depreciation expense is written off against the company's profits each year over the useful life of the asset. This period varies depending on the type of asset. On the other hand, revenue expenditure is money that is 100% written off against a company's profits at the time it is actually incurred. An example of this is research & development expenditure, where there is no guarantee that it will lead to revenues in the near or distant future. Ultimately, any expenditure that is capitalised has a lesser short-term impact on profits.)

The City, so normally pre-occupied with the short-term, was probably feeling rather bittersweet about today's results and outlook statement. Whilst they would be first to acknowledge the need for the retailing giant to spread their wings internationally to continue to fuel growth, they would be disappointed that results weren't going to be seen right now in the form of significantly higher profits in the 1999 fiscal year. In fact, it looks like today's figures will result in estimates for 1999 being reduced slightly from the 8% growth rate that was previously forecast. However, if the additional sales and profit growth kicks in as expected from 2000, analysts may ramp up estimates for that year.

Like many retailers, M&S has found recent trading tough. However, it wasn't so much the local economy that was causing the problems. Their exposure to the depressed economies of Europe and the Far East, combined with the strength of sterling, saw profits from overseas operations £23m below that of last year. Overall, M&S' operating margin fell from 13.2% to 12.9% and this gives an indication of the competitive retailing environment in which they operate. At 576p, the shares trade on a trailing P/E of 20.7, which is a fraction above their average trading level by that measure over the past 5 years. They are certainly no bargain, and the company is banking on their huge expansionary programme being successful. The undoubted strength of the Marks & Spencer brand name coupled with their retailing expertise will give them an advantage over the opposition. Based on their past record, it would be foolish to bet against them succeeding.

Fast growing Helphire Group, the company that provides credit hire cars and credit repair services to motorists whose own vehicles have been involved in accidents, saw their shares crash 24p to 451p. This was despite the group recording turnover growth of 154% to £25m, pre tax profit growth of 137% and EPS growth of 25% to 10.9p. Shares in the company have virtually gone in a straight line upwards from their low of 110p not long after floatation in 1997. Today's results mildly exceed expectations and even after today's fall in the share price, they still trade at a premium trailing P/E of 41.

And Finally...

Don't forget that the Motley Fool message boards are the place for you, the individual investor, to go to register your opinion about the economy, individual shares, inflation rates and to tell the world how wonderfully Foolish you are. Above all, it is another great place here in Fooldom for you to learn about the world of shares and stock market investing.

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Bruce Jackson (TMF Googly)

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