After more than seven years, the UK economy is finally starting to pull itself out of the hole it found itself in after the global financial crisis.
The most recent set of economic figures shows that during the first-half of this year, the economy grew by 2.9% on an annualised basis, and household disposable income rose by 4.5% year-on-year, the fastest annual pace since the second quarter of 2001.
What’s more, data published this morning showed that UK wage has jumped to a six-year of 2.9%, and the jobless rate has fallen back to 5.5%.
Rising wages and an increasing number of people in work should continue to support domestic demand and economic growth. Four companies that are well positioned to benefit from this trend are Dixons Carphone (LSE: DC), NEXT (LSE: NXT), Marks and Spencer (LSE:MKS) and Home Retail (LSE: HOME).
Consumer demand
Dixons Carphone is already benefiting for increasing consumer spending. Last week the company announced that group like-for-like sales expanded by 8% during the three weeks to August 1. UK sales were responsible for the majority of this growth. Like-for-like sales in the UK and Ireland expanded 10% during the quarter. Southern Europe revenue was flat, as an improvement in Spain and growth in Greece was offset by challenging markets elsewhere.
Similarly, Next reported last week that group pre-tax profit and revenue both rose during the first half of the company’s financial year. Higher-than-expected full-price brand sales drove pre-tax profit for the 26 weeks to July 25 to £347.1m, up 7.1% year-on-year. Total sales revenue for the period rose 2.2%.
And in a week of upbeat retail trading updates, Home Retail also announced last week that total group sales during the first-half of its financial year expanded around 1%. However, store closures had an effect on the group’s top line figures. On a like-for-like basis during the first-half Argos’ sales declined 3.4% year-on-year while Homebase’s sales rose 5.6%.
Unfortunately, Marks is the laggard of the group. But an improving UK economy should help lift the retailer’s sales throughout the rest of the year. City analysts are predicting that Marks’ pre-tax profit will expand nearly 10% during 2015 to £658m, and by 2017 analysts expect the company to report a pre-tax profit of £771m.
Take your pick
Dixons, Marks, Next and Home Retail all have their own attractive qualities and their valuations reflect this.
For example, Marks currently trades at a forward P/E of 15.3 and yields 3.6%. Home Retail trades at a forward P/E of 11.2 and yields 2.9%. Next is the most expensive of the group. The company currently trades at a forward P/E of 18.9 and yields 4.2%.
Finally, Dixons trades at a forward P/E of 14.8 and yields 2.2%.
Foolish summary
Overall, if you’re looking for a play on the UK’s economic recovery, Dixons and Next look to me to be the best bets. While the companies look expensive relative to peers, their sales and earnings are growing rapidly. It could be worth paying a premium for the shares.
