The Beautiful Swann and The Ugly Duckling

Morningstar columnist Rodney Hobson takes a look at the management changes at WH Smith, the plight of Thomas Cook and the success of the Direct Line flotation

Rodney Hobson 12 October, 2012 | 5:25PM
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Beautiful Swann …

Investors were quite right to take fright at news that Kate Swann is to step down next June after nine years as chief executive of WH Smith (SMWH). Despite a 10% rise in pre-tax profits for the year to the end of August, plus a 22% leap in the final year dividend, the shares promptly dropped 45p, a remarkable tribute to the woman who rode to the rescue nine years ago.

There were those who thought that Swann was given the job because WH Smith was in so much trouble that no man wanted the poison chalice. That may well have been right. However, she went on to become one of the finest arguments against male prejudice.

WH Smith was rapidly losing market share back in 2003 as it failed to come to terms with changing conditions on the High Street. While Woolworth, among others, subsequently went out of business and HMV (HMV) and Waterstones slipped into decline, Swann concentrated on lines that sold best, cut out the news distribution business and expanded into airports and railway stations where sales were more promising.

If that sounds simple and sensible, one should remember that this policy was not blindingly obvious at the time. In fact, the strategy was extremely brave and fraught with dangers.

Perhaps Swann’s departure has been rumoured so often that it comes as a shock to find that this time it is true. She is only 47, a bit young to be thinking of retiring, she is apparently in good health and there is no immediate announcement of an alternative, more lucrative post.

Investors will naturally worry that she is going out at the top and that problems are looming. Swann has built her success on cost cutting, a policy that inevitably reaches a conclusion. The additional £12 million announced with the result may mean that there will be no more costs that can go after that without damaging the business.

Trading conditions are described as challenging, a pretty meaningless word until you set it against a continued drop in like-for-like sales of 5%, the same figure reported for the latter part of last year. However, if cost cutting is reaching its conclusion, then Smith will have to grow sales substantially to keep the momentum.

The replacement is Steve Clarke, previously managing director of WH Smith's High Street business, the very part that has quite rightly been shrunk. He may find that the chalice still contains poison.

Meanwhile, investors should watch out to see where Swann turns up next. The company that takes her on as chief executive could be the next high flier.

… And Ugly Duckling

The ugly duckling in question is not, let me hasten to say, Harriet Green but the company she now runs, Thomas Cook Group (TCG). Green could indeed become the next Swann, having taken over a struggling company three months ago and acting right away to cut costs.

Alas, while WH Smith was sickly, Thomas Cook is seriously afflicted and may be mortally wounded. (Take a look at the three-year stock price performance to get a basic idea of how bad it is over at the holiday and travel company.) Green came in from outside the travel sector, and while new thinking is welcome, one has to say that package holidays present challenges that only the industry really understands. Even those on the inside have found the problems of booking sufficient seats and beds insurmountable.

Despite coming off the bottom in recent weeks, Cook shares are still below 20p so you can get an awful lot of them for your money. However, it still looks far too high risk. If Green can pull this one off, she will outfly Swann.

To learn about a different travel operator favoured by Henderson money manager, Job Curtis, watch the video “Fund Managers’ Favourites: Top Dividend Picks”.

Line and Float

The successful flotation of Direct Line (DLG) is a cause for celebration, and not just by majority owner Royal Bank of Scotland (RBS), which has been forced to spin off its insurance arm as punishment by the European Commission for accepting a state bailout.

We have seen far too few floats since the financial crisis began and even fewer of any quality. That Direct Line got away comfortably within the projected share price range and moved higher in conditional trading shows that a decent company can be brought to market.

Those companies whose flotations were pulled because of supposedly erratic stock market conditions were clearly not up to scratch. RBS had no choice in its timing and still scored a success.

It is great to see that private investors were given the chance to take stakes and that they grabbed the opportunity. Direct Line shares are unlikely to rise much further for some time as RBS will be offloading more shares over the next couple of years, but the prospective yield is more than 7% so shareholders will not be too worried about any lack of capital gains.

For those who bought in, this looks like a strong long term investment. For those who didn’t, it would be sensible not to chase the price any higher. There could be better opportunities to buy in when the euphoria has died down.

To learn more about the recent Direct Line flotation and the London IPO market, read “Direct Line: An Indirect Market Debut”.

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Rodney Hobson is a long-term investor commenting on his own ideas and portfolio; his comments are for informational purposes only and should not be construed as investment advice.

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
NatWest Group PLC323.60 GBX-0.98Rating
WH Smith PLC1,212.00 GBX-0.08

About Author

Rodney Hobson

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

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