Time to take stock of market forces

Mark Stretton examines the role of the City analyst - the professionals charged with the difficult task of predicting winners and losers of the stock market.

As anyone who has ever tried will testify, predicting the future winners and losers in business is a sport strewn with the debris of tarnished reputations.

Some months ago an aspiring Wall Street-Gordon Gekko type who works on The Publican's commercial team approached the City & Business desk for advice, wanting to know if shares in Bulmers and SFI were worth a punt.

The advice our Gordon received was quite positive - the shares did look very cheap at the time. Shortly after, both companies almost imploded.

Bulmers discovered a rather large black hole in its books, sacked its management team, scrapped a load of brands and the shares went into freefall.

SFI ran out of cash, also found a black hole, put a load of bars up for sale and its shares were suspended at 31p. Often it's best to leave advice to the professionals. In the case of public companies, pub ones or any other, the job falls to analysts, who are paid to research and scrutinise firms to protect the investments of shareholders. When they get it right they are rewarded handsomely, if they get it wrong they are quickly shown the door.

Fortunately, analysts' methods of assessing public companies are a bit more scientific than a quick chat at the coffee machine. But they still do make the odd calamitous gaffe.

There was the famous case of the analyst who, at the height of the internet boom, backed a technology company called QXL, setting a whopping target of £45.00 for the share price when it was still a minnow.

A few months later, after the dotcom crash, QXL shares were worth a few pence, and are now, less than a penny (0.28p). It's the stuff of nightmares.

With that in mind, WestLB Panmure has just published its annual 150-page review of the licensed retail sector called Licensed to Print Money? 2003. The document gives a run down of all the pub companies that are quoted on the stock market, assessing their chances of future success.

The research team at Panmure is headed by Douglas Jack. Mr Jack is held in relatively high regard, especially given his recent coverage of SFI Group.

While some analysts lost their heads and punted the stock with bullish research notes Mr Jack kept his, remaining either neutral or negative in his ratings of the company. He was also first to alert the City to the cash-flow crisis at SFI.

Using a host of criteria including financial strength, property arrangements, market positioning, consumer confidence, licensing reform and a few clever sums, Mr Jack and his team assesses a clutch of pub operators.

As well as analysing individual companies the report takes a look at some of the issues that will affect the industry like the tax increases on pre-packaged spirits and the soaring cost of insurance.

It also looks at some of the trends that will emerge in the trade.

All too often analysts are seen as the glorified salesman of shares, often they work for research units of big broking houses, whose job it is to encourage people to buy clients shares. While Mr Jack escapes this accusation more than most, it is worth bearing in mind that Panmure's parent company acts as either adviser or broker to Fuller's, Inventive Leisure, Po Na Na and Regent Inns.

The winners and losers: Panmure's company assessments​

• Belhaven Group: outperform 322p​

"Belhaven has a broad, robust earnings base with the drinks division generating 40 per cent of earnings," says Panmure. This is helping finance the pub acquisition programme. This sees Belhaven acquire underperforming community pubs and high street venues, reposition them, and reap the rewards. Given the 14 years of sustained growth achieved by the current management, Belhaven deserves its high rating, the report says.

Eldridge Pope: underperform 115p​

Despite numerous downgrades, shares in Eldridge are still riding high relative to its sector rivals. This is unsustainable for a company with a "questionable market position and a cautious outlook". Ouch. Takeover speculation has held the share price up, but investors who view "the Toad concept as a poison pill could find much better value elsewhere". Mr Jack would appear to share the view that the Toad high street "chameleon" bars, predominantly leasehold, are not the way forward. The company needs to focus on unbranded freehold pubs.

Enterprise Inns: neutral 545p​

The Panmure team does not really have a bad thing to say about Ted Tuppen's outfit, but remains neutral on the business. The Laurel and Unique deals locked in strong earnings growth until 2005. The defensive characteristics of Enterprise - the UK's biggest tenanted and leased business - should see the shares remain popular in the short term.

Fuller, Smith & Turner: buy 433p​

"In our view, Fuller's offers an attractive blend of earnings growth, capital return and value. With arguably the strongest balance sheet in the sector, Fuller's has considerable financial firepower," says the report. Given high property prices and the company's low market valuation, it is currently doing the right thing by returning cash to shareholders through buy backs, says Mr Jack.

Greene King: outperform 637p​

An excellent defensive stock in an uncertain environment says Mr Jack and his band of merry analysts. The company is aiming to grow profits by 10 per cent each year. Every company sells its underperforming pubs, and a faster "churn" rate could improve profits. The target share price, set by Panmure, is 750p.

Inventive Leisure: buy 99p​

"We once said that Inventive Leisure would be one of tomorrow's stars: recent out-performance indicates tomorrow has arrived." Lofty praise indeed. WestLB said the company was driven by a strong management team, a customer-service culture and had a clearly differentiated offering in the Revolution chain of vodka bars. WestLB says Inventive should roll out 120 Revolution bars. The company recently announced interim results of £1.7m profits on sales of £17.4m.

Luminar: outperform 292p​

The considerable fall in Luminar's share price is overdone, says Panmure. The management have acted following its profits warning last November, by reducing costs, selling unprofitable outlets and kicking forward with a refurbishment programme. It has one of the most experienced management teams in the sector. The shares should start moving north when consumer confidence returns. Panmure says consumer confidence will not be back before the autumn - presumably it is talking about autumn 2003.

Po Na Na: outperform 14p​

The company, led by Christian Arden, is emerging from a torrid time, having disposed of its troublesome underperforming outlets. This should increase profits and reduce debt. Mr Arden has been tipped to buy the company back from shareholders, and because of the low share price, Panmure has upgraded its recommendation to outperform.

Punch Taverns: outperform 155p​

Punch shares - near an all-time low - trade at a significant discount to those of its nearest rival Enterprise Inns, says Mr Jack and his brace-bearing buddies. Punch's profit growth is robust and therefore WestLB Panmure has labelled the stock as an outperformer.

Regent Inns: buy 58p​

"Against a backdrop of strong demand for its sports, music and comedy-led offers, Regent offers an excellent blend of value, yield and growth and is a core sector pick," gush Mr Jack and his City sidekicks. Regent has avoided problems by selling its tail-end outlets. What it doesn't say is that