WH Smith at record levels

Late last year we asked whether WH Smith was worth buying into. The answer was a resounding "yes". And investors who took that cue would have been quids in. The share price bounced off technical support at 1,000p and has kept on going, now sitting at an all-time high at around 1,600p. Now we ask, can this outstanding rally continue?

Well, this third-quarter update was short on detail, but it was enough drive the share price up another 4% Wednesday. Sales in the 13 weeks to 30 May rose by 1% year-on-year and were flat on a like-for-like basis. Both a 4% increase in like-for-like sales at the travel business - airports, railway stations, motorway services - and 4% decline at its high street operation were a little better-than-expected.

Travel, where actual sales were up 8%, continues to benefit from Smith's new "Food to Go" range. Gross margin improved and the new store opening programme is going well. The decline in high street sales was no surprise, and both margin improvement and cost cutting went to plan.

"We will continue to focus on profitable growth and cash generation while investing in new opportunities in both Travel and High Street that position us well for the future. We remain confident in the outcome for the full year," the firm said.

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Tony Shiret at Espirito Santo expects a 50 basis point (bps) increase in travel margins and extra 200bps at the high street business. "What matters here is direction and continuation of the trend of upgrades at WH Smith over an extended period," he says. "We also note that embedded in the overall numbers is an immature International Travel business. We have low visibility on when that business will start to achieve better profitability, but it does represent option value within a current valuation that has moved up recently to be in line with sector valuations looking out to spring '17."

Shiret currently forecasts earnings per share (EPS) growth of 13% for the year to August 2015, then 10% next year and 8% in 2017. However, the shares now trade on over 16 times forward earnings, which looks full. And, temporarily at least, they are overbought, according to the relative strength index (see chart).

Of course, that overboughtness could wash out in the weeks ahead, and profits are clearly on the up, particularly at the promising travel division. But Peel Hunt suggested recently that material upside is "unlikely," adding that "WH Smith tends to underperform the sector when the consumer is feeling bullish".

One could understand the temptation to take profits at current levels, while interested investors might choose to buy on the dips.

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.