FINANCE AND INVESTMENT
By CUSTOS Tim professional gentlemen in the City were wearing faces of great anxiety this week. Dealings for a new account opened on Wednesday. Could the rise in London go on with New York slumping to the lowest levels for fifteen months? Would the boomlet in British industrial shares peter out if Wall Street continued to discount an American recession next year? To the great surprise of these gentlemen the new account, after an unexciting close to the old, opened on Wednesday with, no signs of nervousness. Gilt-edged stocks were firmer and although textiles failed to hold their earlier rise there was no evidence of a public desire to sell, Probably, the truth of the matter is that the investing public is still on holiday and has not had time to make up its mind about business prospects in, the autumn. The recent rise in prices is certainly not a fair indication of the autumn trend, for it has been largely due to professional activity in markets ill supplied with stock. It was unwise of one expert to suggest that investors should approach the 1953 market with the notion that "it may represent the last opportunity of buying 1953 assets (of British companies) at 1936 prices." This • gentleman must be looking more worried even than the stockbrokers, for he has committed himself in print to saying that the investor who waits for the American recession "may miss the biggest bull market of the second half of the twentieth century." Personally, I am going to wait and see with an open mind and not too many commit- ments in the market.
The Boom in Store Shares This opening raises the question in particular of the boom in store shares which has been the Stock Exchange "star" turn for an exceptionally long time. If we look back to the low levels of 1952—but how many of us took advantage of that wonder- ful buying opportunity?—we will find that John Barker shares have nearly doubled in price, Debenhams have trebled, Great Universal Stores (since the 100 per cent. bonus) have nearly quadrupled and Waring and Gillow did in fact quadruple before reacting. These companies may have developed special situations but even so, of the conventional "leaders" Marks and Spencer have nearly doubled while Wool- worths have appreciated by a modest 50 per cent.! Leaving aside for the moment the "special situations" the market has had solid grounds for investment support. In that difficult year, 1952, for example, the department stores whose reports are analysed in the Economist were able not only to reduce their investment in stocks and reinforce their liquid assets but to increase their net profits by 7 per cent. In 1953 they can - look forward to an increasing turnover, for not only has public buying power been increased, by an influx of visitors for the Coronation, by a higher level of employment and by higher wage rates, but sales have expanded with the abolition of so many rationing controls. The Treasury Bulletin for Industry has reported that the total real expenditure on consumer goods and services in the first quarter of the year was 3 per cent. up—actually 4 per cent. up in food and 5 per cent. up in clothing and footwear—while the total quantity of house- hold goods sold in April and May was about 20 per cent. up on last year. It is small wonder that the market in store shares shows no signs yet of losing its popularity.
"Special. Situations" If it were merely a question of discounting the booming trade of 1953 the market in store shares is probably high enough. The dividend yields alone advise caution. At th'e moment of writing Marks and Spencer yield only 4.2 per cent., Woolworths 41 per cent. Waring and Gillow 3 per cent., Debenhams perhaps 6 per cent. (if the final dividend is increased by as much as the interim), John Barker 6.1 per cent. and Great Universal Stores over 6+ per cent. These returns hardly allow for the inclusion of suitable premiums for the different management and trading risks. But allow- ance must be made for the "special situa- tions." By this I mean a Stock Exchange valuation which is either well below the real assets value, if the properties were written up to 1953 real estate values, or even below the real earnings value, if the business' were aggressively managed, so that the shares are likely to attract (for either or both of these reasons) a bid from some outside willing purchaser. I need hardly mention the famous case of J. Sears (True-Form Boot) whose shareholders accepted a wonderful bid from Mr. Charles Clore although the directors tried to stop it by bumping up the dividend and promising a revaluation of the assets. A curious case of Clore-in- reverse came to light this week when the directors of Max Stone, a company operating sixty shops in the electrical radio trade, offered to buy out the public shareholders at 18s. (against a market price whicif had risen on bid rumours to 15s. 9d.) in order to stop an outsider making a higher bid later on. As the 18s. may be correct on assets value but insufficient on prospective earnings value the directors of Max Stone are not being too generous.
R. Gunner, Ltd.
It is clear that the market can easily make too much of these special situations. For example, International Tea rose Is. this week to 19s. 3d. because a financial gossip-writer pointed out that if the Company wrote up its freeholds and issued, for cash, debentures secured thereon it could raise £3 millions of extra working capital, open new shops and modernise old. But this bright suggestion ignored the increased competition which will be coming in the retail food business now that rationing is being abandoned. Of course, that this threat of cut-throat competition may cause "take-over" bids to be made by large groups for small ones in order to avoid price-cutting, but that hat dlY applies to International Tea. It might, however, apply to R. Gunner which is a small chain operating eighty grocery and butcher shops in outer London. This Company's ls. shares are still fairly priced at 2s. I id. to yield nearly 11 per cent. on divi- dends of 22 per cent. In the year to March, 1953, its earnings recovered to nearly 30 per cent. (against 24f per cent, in the previous year when dividends were cut to 17 per cent.) and in view of the eight new branches opened last year and the further extensions that are in hand its turnover in the current year should be at a record level. Of course; if price-cutting is coming a store company can easily find itself involved in painful stock losses if it is not skilfully managed. I have no reason to believe that Gunners is anything but a well managed chain and if there is a movement towards amalgamations in the retail food business this Company might well be favoured.
Moore's Stores There is another share in the store market which still has speculative attraction in spite of its recent rise.' This is Moore's Store% a very well managed Newcastle business operating over six hundred grocery stores, the third largest retail chain, I believe, in the country. Like some of the "leaders" these 5s. shares have doubled in price since the low levels of 1952, but at the present price of 19s. they return the not unsatis- factory yield of L5+ per cent. The current dividend of 20 per cent., which has been paid for the past five years, was well covered by earnings of 48 per cent. -in the year to January 31st, 1953. In. October last year the Company acquired complete control of certain manufacturing companies in which it previously held minority interests. The profits of these companies were not included in the last year's accounts except to the extent of dividends received. Further, the trading of a number of branches recently purchased in the Liverpool area was not reflected in the 1952 figures. If the profits of these new manufacturing and trading subsidiaries had been included the parent Company's results would have shown a substantial increase on those of the previous year. This hidden surplus and the current increase in turnover promise well for the 1953 results. But what gives Moore's Stores its speculative attraction is the fact that the Chairman has been moved to deny knowledge of the "take-over" bids that have been reported for the Company's shares. The last person to know of any outside bid is, of course, the chairman and his colleagues on the board, for any intending purchaser must keep his plans hidden from Company's executives. The reported bid, for Moore's Stores which has lately attracted heavy buying from the North, is said to be' very much in excess of the present market price. I am inclined to think there is some fire behind this smoke—in the great majority of cases these "take-over" rumours have proved to be well-founded—and although the Chairman may deny that he has been influenced by them, it is significant that he has just announced a new issue of 5s. shares at 10s. in the ratio of one for six. This will bring the issued ordinary share capital up from £360,000 to £425,000. There are only 300,000 preference shares of £1 a head and no debentures. (Subsidiary Company mort- gages total £250,000). Of course, if the take-over bid does not materialise the shares may drop back temporarily, but I would expect higher dividends in due course to bring about recovery. The, shares were actually as high as 18s. in 1947. At the current price of 19s., which still carries the new issue rights wort approximately ls. 6d., they may not be cheaf as an investment, but they have undoubted speculative possi- bilities.
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