Broker snap: WH Smith a defensive buy

3rd Dec 2010 09:43

It's tough out there for retailers but newsagent WH Smith's dependence on small purchases should mean it is less affected than most of its high street neighbours by customers looking to cut back on spending, finnCap argues."Its low transaction value should make it more resilient than many retailers if revenues come under further pressure. In any event, it has proved over several years that it can grow profit even as LFL [like for like] sales decline. Its strong financial position and cash generation provide further underpinning, not least through share buy-backs, the latest phase of which we now reflect in our forecasts," said analyst David Stoddart. The broker is forecasting earnings before interest, tax, depreciation and amortisation for WH Smith in 2011 of £131.3m and profit before tax of £92.1m. The adjusted earnings per share forecast is bumped up by around 3.5% to 49.1p from the previous estimate of 47.4p, to reflect the company's share buyback programme.The price target is nudged up to 565p from 550p."The current bad weather will not be good for the Travel division, with stations and airports closed altogether in many areas," Stoddart notes. "However, we are not yet reflecting these problems in forecasts. First, they have affected only a few days so far. Second, this might be no more than a timing issue, with less trouble than in the comparative period to come later in the winter. Third, management has devoted considerable attention to making the Travel cost base more responsive to business levels: this should dampen the profit impact of any revenue shortfall in the short term," Stoddart added.The next set of results is due in January. The stock's defensive qualities and the share buyback programme make the shares worth buying in finnCap's view.