Today I’m asking whether the shine has come off two former retail high flyers and whether it’s time to focus on a different sector of the market.
Sports Direct, elusive growth
Shares in Sports Direct International (LSE: SPD) have continued to slide this morning after yesterday’s disappointing results. The sports retailer’s shares are now down by 30% from their 52-week high of 820p.
Sales growth during the first half of this year was below expectations. The firm’s underlying pre-tax profit of £166.4m was lower than expected and analysts now seem likely to cut their full-year profit forecasts.
In my view, shareholders face a dilemma. Sports Direct doesn’t pay a dividend, so investors have to rely on the firm’s share price rising to generate returns. The shares are now worth 23% less than two years ago and have fallen by 30% since August.
Will founder Mike Ashley pull something out of the hat to reignite the firm’s growth? Perhaps he will, but because he controls Sports Direct so closely, investors have little way of knowing what might happen.
Personally, it’s not a risk I’d choose to take, especially given the allegations made in the press this week about the firm’s employment and pricing practices.
Halfords, shares to get cheaper?
Shares in car parts and bicycle seller Halfords Group (LSE: HFD) have fallen by 38% from the 52-week high of 562p seen in August.
Like Sports Direct, Halfords’ most recent interim results were below expectations. Like-for-like sales growth of just 1.7% was down from 7% for the same period last year and was less than the 3% expected by City analysts.
However, there are some bright spots. Halfords’ free cash flow remains strong and should comfortably cover this year’s forecast 17p dividend. This gives a prospective yield of 4.9%. The firm’s shares now trade on just 10 times forecast earnings, suggesting that they’re becoming quite cheap.
For shareholders, I think Halfords is more attractive than Sports Direct. I wouldn’t sell, but I’m not sure I’d rush to buy today either. If Halfords has a quiet Christmas then the shares could get much cheaper and become a genuine bargain.
Why buy Glaxo instead?
Halfords and Sports Direct have both delivered strong growth over the last few years, but both firms appear to be entering a period of slower growth.
One firm that could be moving in the opposite direction is GlaxoSmithKline (LSE: GSK). Shares in the UK’s biggest pharmaceutical firm have fallen by around 20% over the last two years due to a period of weak earnings.
However, Glaxo’s recent multi-part deal with Novartis has strengthened and expanded the firm’s portfolio in key growth areas such as vaccines and consumer health. The deal also helped fund a $4bn reduction in net debt to $10.5bn. That’s the lowest level since 2011.
City brokers now believe that Glaxo is poised for a period of growth. Earnings per share are expected to rise by 16% to 76p for 2015 and then by a further 10% to 84p in 2016.
Glaxo shares offer a 6% prospective yield and are currently trading close to their 52-week low. I rate Glaxo as a good long term buy.