View from City Road: Crumbs of comfort on bread sales

Greg Hutchings, chief executive of Tomkins, was playing his favourite record again yesterday. Shareholders just don't understand how wonderful the Ranks Hovis McDougall deal was and the 15 per cent share price underperformance since it was announced is undeserved.

Why should Hanson, BTR and Williams have higher ratings than Tomkins when their profits are stagnant and well below their peak?

The City has heard the song so often that some are starting to sing the same tune. It is, however, worth considering the counterpoint. Mr Hutchings has always insisted that making bread is no different from manufacturing valves, lawnmowers or doors for recreational vehicles and no doubt he is right in the sense they are all businesses waiting to be managed.

What other businesses generally do not have to contend with, however, is a customer base in the form of the big supermarkets willing to sacrifice pounds 50m of profit in the interest of offering the lowest priced bread. Tomkins claims that all of that has been absorbed by the retailers, but just try getting prices up in that climate.

Products such as air conditioning and bathware may benefit from economic recovery, cycles and mobile homes from increased leisure, but neither of these factors is going to persuade us to eat more Bisto or Cadbury's cakes. That was underlined by the fact that virtually all the pounds 30m or so increase in RHM's contribution to operating profits came from cost-cutting. Demand was static at best.

The rationalisation programme has about another two-and-a-half years to run, so there should still be substantial cost-cutting benefits to come. Paradoxically, however, Tomkins' success in maintaining a smooth upward earnings curve through the recession may mean the impact of recovery in other businesses is less pronounced than at other industrial companies.

That partly explains the disparity in share rating. On a calendar-year basis, Tomkins' multiple of 13 is about 20 per cent below that of its three big rivals, but its earnings are forecast to rise at a similar rate. With half its sales and 44 per cent of its profits coming from food, it has far more exposure to one industry than any of them - the closest is Hanson, with about 30 per cent tied up in tobacco.

Mr Hutchings should perhaps be grateful that its shares are at a 10 per cent premium to food manufacturers.

A 13th successive year of earnings outperformance and continued impressive cash generation are two reasons why a premium rating is deserved. Until he can prove the magic will work on bread and buns, however, the investors' song is likely to remain the same.