Rentokil
Rentokil (LSE: RTO)
Quite a bit has happened in the last few weeks. Alan Brown, the current chief executive, has announced that he is leaving. Meanwhile, the company has delivered a reassuring set of half-year results. The shares have bounced nicely to 103p, which now rates the company on a higher forward price/earnings multiple of 12.1 times. A quick gain of 15.7% on the shares is nice to have but I think there's more to go for with Rentokil.
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First and foremost, I believe there's room for a new chief executive to make further improvements to the business. Now that City Link has gone, he can finish tidying up the company by getting rid of the facilities management business which does things like catering, cleaning and security for the government and commercial customers. It doesn't make a lot of money and has much lower margins than the rest of the business.
The new boss will be under pressure to boost the profits of these businesses. Despite its good financial performance, many investors think that Rentokil should be doing better than it is. There's always the chance that a management team from another company might think they could do a better job, and so attempt to buy Rentokil outright. If the facilities management business is sold, it makes for a cleaner purchase. That said, even ignoring potential bid hopes, City analysts still expect earnings growth of 11% next year and increased cost savings could see this rise. The shares still look worth buying.
Verdict: keep buying
Darty
Darty (LSE: DRTY)
Yet Darty has three decent businesses, in France, Belgium and the Netherlands. It has got out of Italy and shut all its shops in Spain. If it can get out of Turkey, the Czech Republic and Slovakia, then it will have a profitable business that could still look cheap at the current share price. But recent trading has been weak, with product margins under pressure and debt edging up. So it's tempting to take profits.
Darty is also still a contrarian investment, with only one out of the 14 analysts covering the stock rating the shares a buy. It will only take one or two of these to turn positive to see the shares spike up again. Despite the temptation to cash in, I think Darty shares are still an interesting gamble.
Verdict: hold on to your shares
