Shares in upholstered furniture and flooring retailer SCS (LSE: SCS) have soared by as much as 20% today after it released an upbeat trading update ahead of its interim results.
It said trading over the crucial Christmas and January sales period remained strong within both SCS and House of Fraser, with like-for-like (LFL) sales rising by 8.8%. That’s a superb result not only because last year was a tough comparative period, but also because the performance of the wider retail sector over the Christmas period has been rather mixed.
Due to its strong trading in recent weeks, SCS now expects to report profits that are significantly ahead of current market expectations for the full year. And with SCS having been forecast to post earnings per share (EPS) of 14.1p for the current year prior to today’s update, its shares continue to offer good value for money. That’s because they trade on a forward price-to-earnings (P/E) ratio of just 10.8 using previous guidance, which means the’re even cheaper given the fact that the company has increased its guidance for the full year.
Clearly, SCS is benefitting from an improving UK economy and this trend looks set to continue over the medium term. Although interest rates are likely to move higher within the next year, their pace of rise is set to be slow and this should encourage consumer spending to remain relatively robust. Furthermore, with global deflation still being a major risk, the Bank of England is unlikely to move rates higher at a rapid rate. Continued low inflation not only backs up this view but also indicates that real terms disposable incomes in the UK are likely to rise over the medium term.
As such, and while SCS remains a highly cyclical and relatively risky buy, its shares could move significantly higher and this makes it a relatively appealing buy at the present time.
Competition-beater
Also focused on the UK economy is Premier Inn and Costa Coffee owner Whitbread (LSE: WTB). It has been a major success story of recent years, with its product/service offering being exceptionally strong. In other words, Whitbread has delivered exactly what customers have wanted, with its budget hotel division beating the competition on value for money, while its coffee chain has consistently beaten rivals on quality and overall customer experience.
Therefore, it’s of little surprise that Whitbread has been able to increase its earnings by 18.5% per annum during the last five years. Looking ahead, Whitbread is forecast to post further growth of 13% in the current year, followed by growth of 12% next year. And with its shares trading on a price-to-earnings growth (PEG) ratio of 1.5, they appear to offer excellent value for money given that the company has such a reliable track record of earnings growth.
One potential risk of investing in Whitbread is the introduction of the living wage. This will affect the company in a major way since around 42,000 of its employees are paid by the hour and its strategy to cope with it appears to be to increase prices. While this could maintain margins, it could also cause sales to come under pressure. As such, and with Whitbread’s management team having changed recently, it seems to be a stock to watch, rather than buy, at the present time.
