WH Smith worth buying into?

WH Smith demonstrated its defensive qualities after a record performance at the travel division jetted earnings above consensus estimates. And a round of cost-savings and smart management improved margins, easily offsetting a dip in sales.

Earnings rose across the group, with underlying pre-tax profit up 9% at £112 million, giving underlying earnings per share (EPS) of 76p, up 20%. This was largely down to improvements at the travel business, which drove double-digit growth to £73 million. Total sales rose 4% and like-for-like sales were flat, with better revenue from airports and hospitals making up for a fall in rail.

Smith's high-street business did well, too. Improving its gross margin by 190 basis points increased profit by 4% to £58 million, despite a 6% drop in total sales and 5% decline on a like-for-like basis.

And free cash flow of £98 million means another £50 million share buy-back, which should underpin the shares, and an increase in the dividend of 14%. Since 2007, WH Smith has returned £627 million back to shareholders.

Management says the dip in sales "reflects our profit focused strategy". Clearly, investors are impressed. The share price jumped 22p to 1,018p in morning trading, bouncing off its 1,000p technical support level. And analysts see plenty of upside to the stock, with Investec slapping a 1,400p target price on the retailer and JPMorgan 1,285p.

"Sustainable business model"

In Investec's mind Smith's valuation does not look demanding as it doesn't yet reflect its ability for strong cash generation and potential to deliver strong EPS growth.

"We see WH Smith increasingly as a play on International travel as this division builds critical mass (138 of 725 travel units)," the broker said, retaining its 'buy' recommendation.

And JP Morgan agrees, with its "sustainable business model" helping it act as a defensive stock - demand for the product does not alter dramatically with economic conditions, like tobacco.

Upgrading its 2015 EPS guidance by 2% to 83p, the stock trades on 12 times JPMorgan's forward earnings guidance. Although risks include peer out-performance and a decline in demand, the broker sees the potential for further re-rating with continued double-digit growth.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.