The Investment Column: John Menzies

JOHN MENZIES has pulled off a textbook lesson in business strategy. Its skills as a retailer were insufficient to see it compete successfully in the high street, so it found new markets for its related abilities in distribution. That market - yet another beneficiary of the outsourcing craze - has better prospects.

But valuing Menzies is tricky. It still has some retail interests in the form of the troubled Early Learning Centre. Like-for-like sales there fell 3 per cent last year. The group aims to sell ELC but, debt-free, it is in no hurry.

The excitement is in Menzies' foray into the airline services business, which handles 320,000 tonnes of air cargo annually. This year it won contracts with Qantas and Heathrow airport. A joint venture with Lufthansa is progressing well. The division's sales grew 10 per cent to pounds 47.6m. Menzies has around pounds 100m firepower and, presumably, access to Lufthansa's coffers, to grow the division by acquisition.

Meanwhile, Menzies' business is dominated by the distribution of magazines and newspapers. Track record is a major source of competitive advantage here - no one likes to miss their daily paper - and the division should continue to generate plenty of cash for investment elsewhere in the group.

The group's shares have trickled down from a one year high of 571p as the market struggled to comprehend the evolution within the group. They closed up 21.5p yesterday at 371.5p. DKB expects pre-tax profits of pounds 34.1m and earnings of 35.2p per share this year, rising to pounds 38.5m and 39.6p in 2001.

Menzies will doubtless look different next year. But the shares do not deserve a forward p/e of 10. Buy.