Turkey of the week: niche retailer with grim fundamentals
By
Paul Hill Nov 27, 2009
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Christmas sales this year are set to fall for the first time since the late 1980s. Researcher Verdict reckons non-food sales will fall by 2.5% or £1.3bn. This makes sense to me, given the heavy discounting that many retailers are already pursuing to capture a greater share of household budgets.
How will this affect Mothercare, the specialist baby-products group, which also owns the Early Learning Centre toy shop chain? Its niche merchandise isn't cheap, so it isn't likely to benefit from the shift towards austerity. Yet its shares have gone to the moon, having more than tripled since hitting a low of 260p in October 2008.
So why the premium rating when the fundamentals look grim?
Bulls argue that the firm's products are recession-resilient – consumers might be prepared to ditch buying LCD TVs, but won't scrimp on gifts for their children.
I'm not convinced. I see Mothercare as a late-cycle business that will escape the ravages of a slump – but only up to a point. When unemployment, wage cuts and taxes start to bite in 2010, a growing chunk of middle England will either down-trade or opt for hand-me-downs, instead of forking out for designer prams and expensive children's toys.
Mothercare (
LSE: MTC
), rated a BUY by The Independent
The bulls then point to the board's aggressive strategy to expand overseas. Mothercare already operates in 51 countries, which account for more than half the group's underlying profits (EBITA). Indeed, such is chief executive Ben Gordon's confidence that he plans to open another 53 franchised stores outside Britain in 2009, thus ending the year with more than 700 international outlets.
I'm not knocking the management team. They've done a good job in beating their peers during the downturn, with sales growing after the demise of both Woolworths and Adams 12 months ago. But I just don't believe the stock can justify its stratospheric rating. The City expects 2009 turnover and underlying EPS of £779m and 33.7p respectively, leaping to £819m and 37.7p in 2010. That puts the shares on stretching p/es of 18.8 and 16.8, compared to the rest of the sector, which is on a 12 to 14 times multiple. This is far too rich, especially as first-half like-for-like sales, after stripping out foreign exchange benefits, were only up a meagre 2.5%.
I would value the group on a ten-times EBITA multiple. Adjusting for the £8m of net cash and the £45m pension deficit, this gives a fair value of around 450p. And with heavyweights such as Tesco, M&S and John Lewis muscling into this sector, 2010 will get progressively tougher. You can get better bargains elsewhere.
Recommendation: SELL at 633p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments
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