Put these two on your shopping list
But there’s no hurry – wait for a downturn in the market
“DON’T BUY NOW, but look for shares with a sound history and good prospects. Wait for a downturn – it will come, even though on the JSE these days the only way is up – and then buy at lower prices. Preferably at support levels. If you buy too early, and the price keeps falling, use Warren Buffett’s advice: ‘If you pick up a bargain, and the price falls, buy more, because then it will be a bigger bargain!’. ”
This advice comes from a leading stock market commentator, following the recent column in which we discussed investors’ uncertainty about what to do next. ( Finweek, 8 February).
Well, what kind of company is sound? Recently there have been two good examples: Woolworths and City Lodge.
The most interesting aspect of Woolworths’ half-year report to December, is undoubtedly the success it’s achieving with its convenience food stores, currently being opened at a rapid pace. CEO Simon Susman believes that the trend of buying pre-prepared food at convenience stores has only just started in SA.
Turnover in the group’s food division increased by about 26% (21% in 2005) – despite problems with supplies over the Christmas period – and its contribution to revenue is now 53%, which confirms to what extent the share is acquiring a defensive character. This assumes that its vulnerability is less during market corrections, since food is regarded as non-cyclical. It’s in the process of enlarging market share, which is currently at 9%. The company’s clothing and household goods only recorded an improvement of about 14%. This is an area where intense competition is experienced from chains like Mr Price, Boardmans and @Home. The financial services division is still growing strongly, with an increase of nearly 25% in the value of its personal loans, shopping and credit cards.
The Australian subsidiary, Country Road, showed continued improvement.
Profit after tax grew to A$5,2m (A$2,3m), after turnover rose by just under 14%.
At nearly R9bn (R7,4bn), Woolworths’ total group turnover for the half-year was 21% up on the figure for the corresponding period of the previous year.
Operating profit shot up by 31%, while the operating profit margin improved to 10,7% (9,8%).
However, headline earnings rose by only 22% (partly because of non-recurring STC), while the interim dividend was pushed up by 23%. For the full financial year 125c/share and a dividend of 76c are predicted, which at its current price gives a price:earnings ratio of 16 and a dividend yield of 3,7%.
Woolworths is therefore not cheap. So where should one consider buying it, if there’s a downturn on the JSE? As the graph shows, the highest closing level of 1 750c – before last year’s market downturn should be a good reference point, with 1 280c considered a bargain level. It’s remarkable how quickly and how strongly, Woolies recovered as soon as the 2006 mid-year panic blew over.
Technically, City Lodge has an even sounder pattern. At the time of the market setback last year, it didn’t even drop through its long-term moving average.
The hotel group says in its report for the half-year to December that its average room occupancy has risen to an exceptionally high 83%, which pushed the operating profit margin up to 49,8% (47,3%) and operating profit by 21% to R125m. Headline earnings were 24% higher at 203c/share, while the interim dividend increased by 24% to 145c. Forecast earnings for the full year to June are 425c and a dividend of 301c. At its current price of about 7 400c, that represents a p:e of 17,4 and a dividend yield of 4,1%. Like Woolworths, it’s fully priced, though the dividend yield is attractive.
City Lodge has major expansion plans, including investment in four new hotels, which will push the number of hotels up to 42 and the total number of rooms up from 603 to 4 772. Add to this, healthy growth in business travel and the number of tourists who visit SA, and it’s a worthwhile stock to include in one’s shopping basket. An increased demand for hotel accommodation in the run-up to the world soccer tournament is another important plus factor.
The balance sheet is strong and cash flow is good. In the past half-year, R6m (R4,5m) interest was earned on cash balances. The new hotels and the expansion of existing units will cost about R171m, of which R20m has already been spent.
At what level would this group offer a buying opportunity during the next market downturn? A good idea would be somewhere around the value of the long-term moving average at 5 800c. The graph confirms that every time the price falls to the average, it represents a buy opportunity.