Emma Wall: Hello and welcome to Morningstar. I’m Emma Wall and here with me today to give his three stock picks is Will Meadon, manager of the JPMorgan Claverhouse Trust (JCH).
Hi, Will.
Will Meadon: Hello.
Wall: So what’s your first pick?
Meadon: My first pick is Dixons (DXNS), which is the well-known high street electrical retailer. It has had, and is still going through, great transformation. It was in very bad shape four, five years ago; too much debt, downsizing, and the consumer was under pressure. All those things have changed. It has a new managing director, Sebastian James, who is doing a great job in sorting it out. The valuation is quite compelling, I think, with over £8 billion of turnover for just £2 billion of market cap. The company has net cash and is doing such a good job.
Whilst the high street is still very tough, because of the good job it’s doing, a lot of its competitors are going out of business. Comet went out of business last year; just couldn’t survive on the high street. So Dixons has gained a lot of market share from that competitor. It has recently sold off its few loss making businesses in Europe, most particularly Pixmania, and as a consequence has a very strong U.K. business and a very strong Nordics business, where like-for-like growth is very strong. So I think at less than 50p, that’s a very exciting stock to be in.
Wall: I mean, it has gained market share from its competitors, but what’s to stop Dixons going down that same road as Comet?
Meadon: Well, its balance sheet is in much stronger shape is the key thing. Comet took on too much debt. It was private equity owned and they just simply couldn’t pay the bills and closed Christmas Eve last year. As I said, Dixons has net cash in the bank and I think that cash position is just going to get stronger each year.
Wall: What’s your second stock then?
Meadon: My second stock would be ITV (ITV), the well-known terrestrial broadcaster. Under the very dynamic leadership of Adam Crozier and Chairman Archie Norman, it’s transforming itself from just being a pure play on TV advertising, which is a good business in itself, but very cyclical, and has complemented that with a production division, which produces shows such as Downton Abbey, which they then net worth around the world, and that’s a much more stable business, much more predictable business. I think you could put a much higher P/E on that. I think the market is underestimating the transformation that Crozier and Norman have done on that broadcasting, and in the next year or two we’ll see the benefits of that coming through.
Wall: The economy has picked up and advertising spend has picked up somewhat from the bottom. But it is in a risky place, isn’t it, terrestrial TV? It’s not like the Beeb; it doesn’t have fees coming in to sustain it.
Meadon: Yes, indeed, and I think the management recognize that. It was a very cyclical business. It was quite a, you could say, risky business, but that’s why the strategic move to go into something which is much less cyclical, I think, is a very good idea and one much higher P/E put on the business. A consequence of the two businesses doing very well at the moment is that cash flow is extremely strong, so the dividend growth is good. In fact, it’s so strong that recently ITV paid a special dividend, which of course is very good news for shareholders when income is so important.
Wall: What’s your third then, your third stock?
Meadon: My third stock would be Restaurant Group (RTN), which owns brands such as Garfunkel’s, Chiquito, Frankie & Benny’s. It’s led by chief exec, Andrew Page, who has done a wonderful job there in positioning their restaurants off the high street, but out of town and places next to cinemas and so forth. I’m sure you’ve seen Garfunkel’s or Frankie & Benny’s as you’ve come in and out of the cinema. It’s a very captive audience. Again, it’s a very cash generative business. The execution from Andrew Page and his team has been faultless and I think at a time when consumer spending picking up and the services industry generally in the economy hotels, restaurants are doing much better than they were doing 12 months ago, I think this is a very attractive business.
Wall: Well, the risk with that stock then, is it that it’s just so domestically focused?
Meadon: Yes, it is. It’s just a pure play on the U.K. There are no overseas restaurants. I suppose the biggest risk is that the consumer strength that we’re seeing at the moment doesn’t continue through. But I’m as confident as I can be that consumer spending in 12 months’ time will be higher than it is now.
Wall: Three very diverse stocks there.
Meadon: Indeed.
Wall: Thank you very much, Will.
Meadon: Pleasure.
Wall: This Emma Wall for Morningstar. Thank you for watching.
