Share tip of the week: a healthy bloom on a sickly high street
By
Tim Price Jul 17, 2009
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The British economy shrank by more than 2% during the first quarter – the biggest such decline in 51 years. House prices are still falling. Unemployment is rising. Consumers have retreated to their foxholes and are unlikely to come out soon. And now the recent stockmarket rally looks as if it's coming off the boil.
Where on earth can a British equity investor find something worth buying?
Perversely, perhaps, on the British high street. If there's one thing that childcare retailer Mothercare has got going for it, it's visibility. "Visibility beats frothiness," writes KBC Peel Hunt retail analyst John Stevenson.
While the shares of several general retailers have powered ahead, based on a largely illusory recovery story, there are still "a handful of genuine growth retailers [who] continue to deliver rising cash balances and earnings momentum, with excellent visibility on future plans for the next three or more years".
Mothercare plc (LSE: MTC), rated a BUY by KBC Peel Hunt
Mothercare is one of them. The British birth rate is a fairly unimpressive 0.5% of global births a year. But as Stevenson points out, Mothercare expects to open more than 100 new international sites over the next 12 months and enjoys useful franchise relationships in India, Saudi Arabia and elsewhere. KBC Peel Hunt expects international earnings to generate around half of the group's operating profits by 2011.
Another attractive factor is that, even in a recession, discretionary spending on young children is always among the last things to be cut. KBC Peel Hunt expects compound earnings growth of above 8% a year over the next three years, whereas the average UK retailer can expect to see "material profit declines" for two to three years from 2008.
With cash balances rising, earnings growth ongoing, and clear visibility on management's strategy, Mothercare probably deserves to trade on a decent premium to the retail sector. The forward p/e ratio stands at just over 15, a modest premium to the wider sector, at some 13 times. The shares have already bucked a poor overall equity market by around 50% so far this year, giving the group a market capitalisation of over £440m. This may be a little ahead of events, but the stock is worth buying for the long term.
Recommendation: a long-term BUY at 532p
• Tim Price is director of investment at PFP Wealth Management. He also edits the Price Report investment newsletter.
• Paul Hill is away
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