Sainsbury's offers no bargain

Cranswick; ITE Group

Sir Peter Davis, J Sainsbury's chief executive, looked a little mystified yesterday as to why his interim results were being given such a questioning reception. Look how far we've come in little more than a year, he said. Like-for-like sales growth is higher than for a decade, the stores are being refurbished, customer numbers are up 6.2 per cent in the first half and market share has been stabilised. So what if Jamie Oliver's wife was photographed coming out of Waitrose, it's a free country isn't it?

And what did he get for all this? A small drop in the share price and a bunch of carping analysts' comments.

To be fair to Sir Peter, Sainsbury's has genuinely made progress since he was appointed chief executive 20 months ago. Last month's trading statement showed like-for-like sales up 6 per cent. And, though there was no update yesterday, Sir Peter said trading in the first five weeks of the second half was "encouraging".

But there was good reason why some of Sainsbury's figures were treated with scepticism. The key point was the judicious use of exceptional charges to protect the bottom line. These totalled £21m in the six months to 13 October, with a whole jumble of things thrown in, including the costs of supply chain improvements and "introducing new ways of working", which is Sainsbury's argot for sacking people. Many of Sainsbury's rivals take most of these things above the line. Add them back in and profits were down 4 per cent to £366m, rather than up 10 per cent.

It is hard to assess just how firmly rooted the Sainsbury's recovery is. After three consecutive quarters of 6 per cent underlying sales growth the business appears to be heading in the right direction. Cost savings of £150m are expected this year and store refits are tipped to yield ultimate sales uplifts of 12 per cent. But comparisons are weak and the benign trading environment could soon get tougher.

Assuming full-year profits of £625m (excluding "exceptionals"), the shares – down 1.25p to 385.75p – trade on a forward price-earnings multiple of 18. That only merits a hold.

Cranswick

If a company that produces ham and sausages said it had boosted profits by nigh on 50 per cent in the past six months, despite the closure of export markets due to foot-and-mouth, you would think they were telling porkies.

But Cranswick has achieved it, having found new UK sales to replace exports, and pushing through price rises by concentrating on the posh end of the market. The company's pork loin joint with apricot stuffing is an award-winner, and the group now produces 1.5 million gourmet sausages every week.

Cranswick made pre-tax profits of £6.6m in the six months to 30 September, up from £4.4m. The group has scope for more acquisitions to boost the core business, and has a good record in making such deals work. Two months' worth of sales from Continental Fine Foods contributed £600,000, ahead of forecasts.

Several of the niggles surrounding the rest of the business have been cleared up. A unit producing pig feed was a drag in the first half but should return quickly to profit after rivals, including AB Foods, cut capacity. There were also positive noises yesterday on new distribution deals for the pet food business, and the Yorkshire-based Cranswick's management were again fêted in the City. The shares, at 652.5p, are at a record high.

Beeson Gregory upped its forecast of full-year profits to £15.1m, putting the stock on a p/e of 12. That is at a deserved premium to the food sector.

ITE Group

Everyone seems very excited about Moscow Building Week. The event, a giant trade fair for construction firms touting for business in Russia, is run by ITE Group and has sold out six months early. Russia's new-found acceptance within the international community has helped no end, it appears.

Which is good for ITE. More than two-thirds of its business is in the former Soviet Union and, although the risks remain high, the stock is looking an interesting recovery play. The shares were up 3.25p to 19.5p on current trading news yesterday.

Investors shrugged off a warning on next year's profits, which will again be hit by economic weakness in Turkey, Egypt and Asia. The company is writing off more than £20m from the value of acquisitions made in a spending spree by the previous management. The new chief executive, Stephen Warshaw, has made cutting staff turnover a top priority and promises a more select approach to acquisitions. He will stick to core sectors such as oil and construction rather than branching out into new areas.

On 7 times forecast earnings for the year to September 2002, and with ITE's biggest biennial events not scheduled until the following year, the shares have scope to rally if all goes well. A speculative buy.