Enterprise Inns is on road to recovery

By Graeme Dickson
Updated: 12:09 EDT, 6 October 2010

Given that the US second quarter GDP figures came in better-than-forecast last Thursday, showing growth of 1.7 per cent, you would expect a surge in the UK & US markets.

In fact, the opposite happened. The FTSE and the S&P fell 0.37 per cent and 0.3 per cent respectively.

The main cause attributed to the modest fall, was down to 'position squaring' or 'window dressing' as it is sometimes known.

This is where fund managers sell stocks the fund owns for a variety of reasons, including the tidying up of portfolios, to cutting stocks that would be perceived as 'sensitive' to its clients such as BP to US investors (after all Tony Hayward, the former chief executive was at one stage more hated in the US than Osama Bin Laden) before the clients read the quarterly reports.

On Friday 1 October, it seemed that the market's heavy hitters were keen to put their clients' money to work, with modest gains in the FTSE 100 & S&P 500, despite worse than expected US manufacturing data from the Purchasing Managers Index (PMI).

Yesterday, all was forgiven after a surge in service sector activity in the US. The Institute for Supply Management showed a better than expected reading, kick-starting a sharp rally in UK and US equities.

Interestingly, we are also seeing record highs in certain commodities, most notably in gold, where it was trading at $1,342 at one stage on Tuesday.

Going back to the indices, now that 5600 has been broken on the FTSE 100, the next obvious target is 5800-5825, this year's previous high. Otherwise expect support to kick in between 5400-5600.

Big mover of the week: how you can profit

One of the best performing stocks since last Wednesday in the FTSE 350 universe has come from the highly indebted pub group Enterprise Inns (ETI). It has added 13.2 per cent to 119p up to yesterday's close.

The main reason for the rally seems to be attributed to a broker note issued by Matrix, which has set a target price of 150p a share, arguing that Enterprise could resume dividend payments in 2011.

Pub group: Enterprise Inns saw its share price jump last week

The broker suggests that the group will benefit from a decent summer. Also, when it announces its preliminary results on 16 November, it is likely to state it's confident of delivering improved results for its financial year 2011 - although 2010's results will likely be inflated by the World Cup.

The company had £792 million in bank debt in May, but with ongoing pub disposals and sale and leaseback deals, Matrix believes it is possible the company will reduce its debt to just £125 million by the end of 2013.

No doubt the company is on the road to recovery, with the share price probably getting a boost from short-covering with its massive 15.4 per cent stock on loan (five times the average amount on loan).

Perhaps 150p might be reached sooner than we think, although with its 34 per cent rise over the last month, I am inclined to wait for a better buying opportunity.

Keep an eye on…

Home shopping retailer N Brown (BWNG) on Tuesday 12 October, when it's scheduled to issue its interim results.

The stock, which closed at 239.9p yesterday, has suffered since July after it admitted that sales growth was particularly slow. It is hoping to bring the growth to pick-up during the course of 2010/11.

N Brown has a reputation of catering for larger, taller and older people. In fact the average age of its client base is 57 years old and it's partly down to the older generation being more reactive to the budget and poor economic news that in turn affects their willingness to spend.

Nonetheless, the company said in a statement back in July it is spending £2 million to help recruit new clients to its 33 different websites and catalogues.

The hope is the company delivers three to four per cent growth during the course of 2010/11, given its value offering and investment in client recruitment.

The company trades on a prospective price to earnings ratio of 9.2 for 2011, albeit the net gearing of 53 per cent needs to be addressed if it desires to get a better rating.

I would be inclined to wait for the results to come out before making a decision on this stock because if it has made little progress on sales growth, the shares will get punished.

If it delivers two per cent plus on sales growth it might suggest the management's pledges are still intact and that would probably be time to dip your toe in the water.

Highlights and gossip in the FTSE 350 from the last week:

• Hedge fund manager Man Group (EMG) added 2.7 per cent to 219.1p last Thursday, after investors reacted warmly to improving AHL figures, its flagship fund.

• Homeserve (HSV), the repair and emergency services company, fell 6.5 per cent to 439.5p despite reporting in a trading statement that it expects to meet full year expectations. The stock was up 60 per cent at one stage over the last 52 weeks, so perhaps a bit of profit taking had to be expected.

• BP (BP.) put on almost three per cent last Friday to 440.5p on talk that Bob Dudley, the new chief executive, is looking to reinstate some form of dividend as soon as possible.

• BG Group (BG.) rallied 4.47 per cent to 1168p after China's Sinopec injected $7 billion for a 40 per cent stake in Repsol's Brazilian unit, in which BG Group has a joint venture with.

• Jardine Lloyd Thompson (JLT) dropped 2.68 per cent on Friday on rumours that all is not well with the reinsurer following the recent resignation of its chairman Andrew Agnew.

• On Monday heavily-indebted Premier Foods (PFD) gained 10.6 per cent to 17.94p after it confirmed it had received approaches for its meat-free businesses including that of Quorn.

• On the same day there was talk that pest control firm Rentokil (RTO) was on the verge of receiving a takeover approach from a European predator.

• Wellstream (WSM) the oil and gas pipe designer and manufacturer was mooted to be on the cusp of receiving a formal 850p a share bid from General Electric.

• Yesterday Computacenter (CCC) gained 5.9 per cent to 322.9p after Investec upgraded the stock to buy with a 412p price target, up from 320p.