Hobson: The Market is Wrong About Sports Direct

THE WEEK: Sports Direct shares have bounced following good year-end results. But Morningstar columnist Rodney Hobson is unconvinced

Rodney Hobson 21 July, 2017 | 11:30AM
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There are times as an investor when you doubt a) your sanity and b) your stock-picking skills, and I went through such a moment early last month after I bought shares in RPC (RPC), the plastic products company. It is smaller than most of my choices but I was attracted by its positive outlook and judged that a fall in the share price from £10.61 at the start of the year to around £8 was unjustified. The shares fell further after my purchase.

The update issued this week showed that I was right and the market was wrong. The trading performance in the first quarter of 2017 exceeded management expectations, with revenue in the quarter to June 30 well ahead of the same period the year before. Although some of that gain came from acquisitions and positive foreign exchange movements, there was also continued organic growth.

Group margins and profitability levels were ahead of expectations, with a favourable currency translation offsetting the impact of higher polymer prices that have still to be fully passed on to customers. Letica has performed well since being acquired in March, with cost savings coming through nicely.

The shares leapt 3%, confirming to some extent the board’s view that the shares were substantially undervalued. I am now 7% up on shares I have held for six weeks. I curse myself for not adding to my holding earlier this week, especially as I have a pile of cash available from the takeover of WS Atkins. If RPC slips back again, I will not make the mistake of holding off again.

This is a great company with great prospects. Despite committing £100 million to a share buy back, RPC has the cash to continue its progressive dividend policy.

Troubled Sports Direct Shares Bounce

Sports Direct (SPD) has garnered a lot of bad headlines along the way but it scored with full year results to April 30. You would think that it had announced something special when the shares reacted with a 10% gain.

I can’t share the enthusiasm. An 11.7% rise in sales makes a good start but margins have been squeezed and underlying profits are less than half those of the previous year. Net debt has more than doubled.

Retailing is a tough place to be and Sports Direct, like many others in the sector, is spending a lot of money transforming its stores, turning them, as chief executive Mike Ashley puts it, into the Selfridges of the sports world. Mr Selfridge would not like the comparison.

An awful lot is being taken on trust at a company that does not pay a dividend. The best I can say is that the shares are a big gamble with the odds stacked against you.

I feel much the same about Premier Foods (PFD), although its reputation is not so tarnished. It has some good brands including Bisto, Mr Kipling and Batchelors.

Sales were down 3.1% in its first quarter to 1 July and it is not much consolation to be told that Premier has done better than its rivals. That simply demonstrates how tough the food market is as supermarkets squeeze suppliers to keep prices to the consumer down. 

The plan is for lower sales in Q1; slightly better in Q2 to make the first half broadly flat; then real progress in the second half. The first part has been achieved. That was the easy bit. We have to take the rest of it on trust, and so much is outside Premier’s control.

The shares were 55p at the end of October and are now below 40p. They have gone nowhere for the past three years and nothing in the statement suggests that that is about to change.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Frasers Group PLC667.50 GBX-0.07
Premier Foods PLC115.60 GBX0.17

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.