US Edition Mothercare's failure to do well in the 1990s always perplexed Questor. About 700,000 babies are born in the UK every year and yet the retailer failed to capitalise on this.
Thankfully the chain, which had a creaking supply chain and dowdy stores, has been reborn under the stewardship of chief executive Ben Gordon. Yesterday it said that first-half pre-tax profits had risen by 124.6pc to £13.7m, albeit aided by the recent acquisition of Early Learning Centre. We think that the shares are a buy.
There are two reasons. For much of the last decade the shares loitered around the 400p mark like bored kids on a street corner. However, they have fallen to below 300p in recent months and Questor thinks this indicates a healthy upside value.
The first reason for this is that Mothercare is expanding rapidly overseas and further benefits of the Early Learning Centre purchase should soon start coming through. It has 572 stores in 49 countries and there is room to grow far bigger. Russia and China will be areas of significant growth in coming years.
The second reason is that Mothercare has no debt. In fact, it has cash of £9m. Mr Gordon was once accused of running the company in an inefficient way by having no borrowings. Now, in today's reversed economic environment, the company is seen as a beacon of prudence.
The retailer increased its interim dividend by 24pc – a measure of its confidence. The stock has a healthy 5pc yield.
The company is protected from the specifics of the UK economy due to its broad geographical spread. It is also partly shielded from an economic slump by the fact that Mother Nature guarantees that Mothercare will get a steady flow of custom throughout the year, recession or not. Buy.
IG Group
166p -62¼p
Questor says Hold
Spread-betting company IG Group delivered a largely upbeat trading statement yesterday, forecasting a 21pc increase in first-half pre-tax profits to £58m, after volatile stock markets encouraged customers to place more bets. Revenues, meanwhile, are projected to climb 45pc to £125m.
Questor thinks that the shares are a hold. The markets, however, took a dim view of IG Group's sharp increase in bad debts, arising from customers failing to pay up when their bets go wrong. Bad debts surged to £15m, equivalent to 12pc of the company's revenues. Normally, recalcitrant punters are responsible for between 2pc and 3pc of revenues.
The company stressed that much of the damage occurred in October when 80pc of the bad debts were incurred. The month was also noteworthy because the Government bailed out the banking sector. The company noted that most of the doubtful debts "relate to a small proportion of the client base". The larger debts arose primarily from customers taking out the wrong bets in RBS shares as well as the main stock market indices.
Also noteworthy was the higher betting duty paid by the company. Betting duty is the tax applied on bookmakers' profits. It came in at £7m against the £5.2m forecast by broker Investec.
On the positive side the company indicated that new financial account openings have risen. Meanwhile, expansion outside the UK continues to go well. However, the big question is whether October represents a one-off. Markets have seen unprecedented volatility and it would take a leap of faith to expect normality to return in the short term. IG Group has a growth story to tell, but bad debts could continue to be an issue. Hold.
National Grid
680p -10p
Questor says Buy
NationalGrid is dull. Safe, secure and dull – exactly what's needed in these volatile times. The utility group reported first-half operating profits up 4pc to £1.08bn and said it is "on track" to meet full-year estimates.
Consumers are cutting down on just about everything, but it is difficult to heat your house without gas and electricity. Also, while the companies that supply power are exposed to fluctuating commodity prices, National Grid's fees for providing the delivery infrastructure are fixed in advance.
Going forward, National Grid will be more of a winner in the second half as KeySpan, its newly acquired US gas distribution business, makes most of its money during harsh winters in north-eastern states. National Grid chief executive Steve Holliday is determined to grow the business by spending £3.2bn this year alone on projects which all look set to deliver good returns. The biggest-ever delivery of liquefied natural gas (LNG) arrived at the group's newly expanded Isle of Grain Liquified Natural Gas terminal in Kent on Monday.
While other companies are slashing their dividend to reign in costs, National Grid has committed to increasing its dividend by 8pc a year for the next three years. With a yield of 5pc it is more than you'd get in a lot of high street banks and just about as safe.
Analysts at Dresdner Kleinwort sum it up best: "The company has a fundamentally defensive business and although no company is without risk in the current climate we regard National Grid as a relative safe haven". Buy.