Weaker sales haven't stopped Harvester-to-All Bar One owner Mitchells & Butlers (MAB) rising 8% to 319.5p on the back of its latest trading update (31 Jan). Share price weakness in the previous month would suggest that the market had already anticipated poor figures. Today's bounce back can therefore be explained as a relief rally.
Compounding the sharp jump in the shares is a concept known as a 'short squeeze'. A sudden rise in a stock disliked by many investors can trigger stop loss positions for traders betting that the shares would keep falling. This effectively forces them to buy the stock to repay the shares they 'borrowed' when taking out a short position, thus sending the shares even higher.
Mitchells & Butlers has a long history of disappointing investors, particularly because it lacked appropriate leadership for many years while it undertook an arduous search for a new chief executive.
The shares have rallied since June 2012 on renewed bid rumours and finally appointing a CEO in September 2012. Alistair Darby was previously chief operating officer at rival pubs group Marston's (MARS) and is well respected in the leisure industry.
The latest trading update would suggest that Darby has his work cut out. Like-for-like sales fell by 0.3% in the 17 weeks to 26 January with Mitchells & Butlers blaming the cold weather and snow for keeping customers out of its pubs and restaurants.
Most analysts are disappointed with this performance. They acknowledge the stock looks cheap on 8.7 times prospective earnings, some 30% below the sector average. Yet few have 'buy' ratings on the stock because they see limited potential for top-line growth. They also see ongoing corporate governance issues due to a complicated shareholder register.
Billionaire Joe Lewis owns 26.3% through his Piedmont investment vehicle. He had a 230p per share takeover offer rejected in September 2011. Horseracing tycoons John Magnier and JP McManus own 22.5% through their Elpida vehicle. 'Whilst it is hard to see how the current major shareholders could benefit their own positions without benefiting independent shareholders into the bargain, the shares retain an element of risk in the eyes of some would-be owners and a price-to-earnings ratio discount to both Greene King and Marston's is perhaps therefore justified,' says Mark Brumby, principal of advisory group Langton Capital.
The trigger for analysts to reappraise their rating will be the resumption of the dividend which several analysts forecast will happen at the end of the 2013 financial year.
