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Your Money > Investing Comment Articles > Up in smoke
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By Richard J Hunter, Hargreaves Lansdown
Probably The other core story around the pub sector has been the extensive property portfolios which many of them own, and how some of this value might be released, either through sale and leaseback schemes, or by converting to Real Estate Investment Trust, or REIT, status. At the current time the pub companies have not generally committed themselves to a plan of action. Nonetheless this has given these share prices some support. Indeed, many of the pub shares have had a stellar run over the last year. During a period when the FTSE100 has risen some 15%, Punch Taverns have made 52%, Mitchells & Butlers 72% and Enterprise Inns 53%. The FTSE250 has risen 29%, and its constituent JD Wetherspoon has spiked by 56%. View Punch Taverns stock page View Mitchells & Butlers stock page View Enterprise Inns stock page View JD Wetherspoon stock page Does this mean that the market now feels the pubs' share prices are full enough for now? The underlying prospects for these companies are still seen as largely positive and in market consensus terms, whilst Wetherspoon is currently considered a hold, Enterprise is positively regarded, Mitchells & Butlers is a buy and Punch Taverns is a strong buy. Turning to the tobacco companies themselves, this has been another strongly performing sector. The economists love to refer to cigarettes enjoying "inelastic demand", that is, consumers will continue to buy them regardless of the price (or indeed obstacles put in front of them, such as the smoking ban). Equally, many of the tobacco companies are moving operations to cheaper overseas destinations, whilst at the same time targeting those less developed countries where smoking is actually on the increase. The likes of Imperial Tobacco and British American Tobacco continued to be regarded as strong defensive shares, given this inelasticity of demand and their strong, stable cashflows. The share prices have also been strong, with Imperial up 33% over the last year, and BATS up 24%. Market consensus positively rates Imperial, whilst BATS is seen as an extremely strong buy and probably the pick of the sector. The smoking ban, where introduced, has had its casualties. The most obvious of these has been the Bingo industry, where people have stayed away in their droves now that smoking cannot be continued in bingo halls. Some of the bigger chains have simply been divesting themselves of their bingo businesses, and their share price performances have been fairly tepid also. FTSE250 constituents Ladbrokes has seen just a 4% rise in its price over the last year, whilst the Rank share price has been completely flat. Nonetheless, the general market views on these companies tend to suggest that this bad news is now being dealt with and has been reflected in the companies' valuations. As such, Rank is rated a (weak) hold, and Ladbrokes is currently positively regarded. There have, of course, been other companies who have been quick to cash in on the new environment, such as the manufacturers of outdoor heaters for those smokers who will continue to visit pubs, even if they must spend some of their time outdoors. For the companies mentioned above, though, the strongest have adapted and again have underlined the importance of diversification in the general business mix. It is far too early to be calling time on these companies just yet. Useful links: |
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