Stocks that could win gold at the Olympics
While all the food retailers may receive a boost in earnings from the 2012 summer Games, Sam Hart, analyst at Charles Stanley, warns that any boost to like-for-like earnings will be 'relatively small'.
"The Olympics will not fundamentally boost earnings," he says, reminding investors of the "challenging consumer outlook and intense competition".
Still, he points to Sainsbury's as a potential winner. "Sainsbury's has a slightly more upmarket bias, and tends to benefit disproportionately from 'special' events as seen over Christmas and the Jubilee weekend," he states.
RED BUSES AND BLACK TAXIS
With around 21% of the London bus market, Go-Ahead Group should be a beneficiary of the increased number of tourists over the summer.
However, while the bus division is expected to remain strong, Gert Zonneveld, analyst at Panmure Gordon, reminds investors that slower-than-expected economic growth and around £6 million of rail bid costs are likely to adversely impact the rail division.
"We continue to remain cautious about the medium-term growth prospects of Go-Ahead," Zonneveld warns. "Winning additional rail franchises remains crucial, especially if the company wants to sustain its current level of dividends over the medium to longer term, but we see few catalysts in the short term, with a winner for the new Thameslink franchise not expected until May 2013."
Intercontinental Hotels Group, which will run the 15,000-strong athletes' village as well as lodging visitors in its London outposts, has already stated that it expects revenue per available room to be between flat and 2% higher over its London hotels this summer.
However, Hart is sceptical about whether the group will benefit that much from the Olympics, estimating that London accounts for between 2 and 3% of group revenues.
A "slight" beneficiary, says Hart, will be Whitbread, via its Premier Inn accommodation.
Simon French, analyst at Panmure Gordon disagrees, stating that the Olympics will be only a marginal positive for Whitbread, "with a number of rooms still available in London Premier Inns".
Investors would be forgiven for thinking that an increase in tourists over the summer would be beneficial for clothing retailers such as Next and Debenhams, or even for sports retailers such as Sports Direct and JD Sports.
On the contrary, Hart believes that the summer Games may actually be a negative for the clothing retailers: "There could be a negative impact from people staying at home to watch the Games rather than spending the day shopping," he comments.
He does acknowledge, however, that Marks and Spencer, like Sainsbury's, could benefit as the retailer's food division could draw in crowds, it has an upmarket bias and also tends to perform well around 'special' events.
BETTING ON BOLT?
William Hill currently offers odds of 7/10 on Usain Bolt winning the men's 100 metres, but for those who want to take a punt on the gaming companies themselves, William Hill appears to be a safe bet.
Not only has the company been unanimously granted a non-restricted gaming licence, the highest tier of licences, by the Nevada Gaming Commission, but the online and mobile divisions of the company have gone from strength to strength.
"We do not view this as expensive for a high quality multi-channel, multi-jurisdiction gaming business," says Simon French, analyst at Panmure Gordon.
French also has a positive stance on Ladbrokes: "Any share price weakness should be viewed as a [buying] opportunity," he states, especially following the dismissal of its head of trading.
While trading has long been a weakness in Ladbrokes with over-the-counter gross win margin tracking 120 basis points behind William Hill in 2011, French believes that this cloud may have a silver lining "if superior traders can be recruited".
However, Hart is sceptical of the beneficial impact of the Olympics. According to him, horse racing and the Euro 2012 football championship are "much more relevant" for the betting companies.
THE GREAT BRITISH SUMMER
According to the Met Office, this June has been the wettest for 100 years. So the wettest British summer notwithstanding, drink companies like Britvic, maker of Robinsons, J2O, Fruit Shoot, Tango and drench, should benefit.
And as friends gather to watch sporting events, pub companies should feel some positive effects too.
"[Greene King's] bias towards community pubs limits its exposure to record petrol prices, and it should benefit from the Diamond Jubilee and Olympics in its 250 London pubs," says French, adding that the first quarter should have started well with the benefit from the Jubilee and Euro 2012.
However, he rates the stock a 'hold' given that the shares trade on a 2012 enterprise value to EBITDA ratio of between eight and nine times, a premium to most of its peers.
THE POWER OF ADVERTISING
"You only have to watch the TV for an hour to see how [the media companies] affiliate themselves with the Olympics," comments Hart.
WPP, for example, notes that 2012 is a "maxi quadrennial" - Olympic and Paralympic games, Euro 2012 and the US presidential election - and that this conjunction of events typically adds between 1 and 2% to global advertising growth.
"WPP is a geared play on [the] global growth outlook," says Hart, stressing that WPP should benefit.
However, WPP doesn't have a flawless forecasting period. Looking back to 2008, with the Olympic and Paralympic games, Euro 2008 and the US presidential elections, WPP predicted at the end of 2008 and through to the first quarter of 2009 that organic revenue growth would be 0 to -2% for 2009. It was eventually -8% and the stock underperformed the FTSE 100 index by 15%.
Hart argues that "2008 was quite an exceptional year. Things were already looking pretty bad before the Lehman crash and lots of companies had cut back their marketing aggressively. While there is uncertainty and moderation in advertising revenues, we don't anticipate an outright decline in 2012/13."
However, he does acknowledge that if there is no solution to the eurozone debt crisis and if there was to be a banking sector meltdown, then the stock could potentially see a return to 2008 levels.
On the other side of the coin, Hart warns that ITV could actually see its share of the audience fall off "quite sharply" given that it has no coverage of the Olympics.
A fall in audience shares will be reflected in the advertising rates that ITV can charge. Given that advertising makes up about 75% of the commercial broadcaster's revenues, Hart cautions that ITV could be a potential loser of the Olympics.
On a more neutral note, Hart believes that British Sky Broadcasting may receive a small benefit. The company could benefit from higher advertising revenues, but given that advertising only makes up about 10% of revenues, this benefit is expected to be quite minimal.
MIND THE GAP
Hart points out there are some stocks that look attractive on valuation terms. On the media side, he recommends Pearson and Reed Elsevier, and in terms of consumer stocks, he thinks that Diageo and SAB Miller offer good value.
In fact, according to research from Saxo Bank, the FTSE 100 could shine over the following year.
"The local index tends to outperform the other indices... just basically from the publicity the country receives," Mathieu Bolduc, equity analyst at Saxo Bank wrote in a report, adding that the past five summer Games saw the host nations' stockmarkets outperform the MSCI global benchmark by an average of 16.4% over the year following the event.
And according to Thomson Reuters Datastream, the FTSE 100 is currently trading at a 12-month forward price to earnings ratio of around nine times, about a 40% discount to the median of about 13 times.
This was written for our sister website, Interactive Investor
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