Gamble of the week: Iconic cooker maker

One of investing's key principles is that risk and reward go hand in hand. To make a lot of money, you're going to have to take a lot of risk. Buying shares in posh cooker maker Aga is a case in point. During the heady years of the credit bubble, upmarket Aga and Rangemaster cookers were flying out of the factories. A rampant housing market saw people upgrading their kitchens with granite worktops, hardwood flooring, and expensive, desirable equipment.

Those days are well and truly over. Not only are people moving house far less frequently (transactions have roughly dropped by half compared to the days of the boom), but remortgaging a house to fund the fitting out of a new kitchen is also far more difficult than it once was. On top of that, big, guaranteed bonuses from the City are also a distant memory.

So it's not really a surprise that sales of all of Aga's range of cast-iron cookers has fallen from 19,600 in 2007 to 11,000 last year. It's a luxury item that's very hard to justify if neither your income nor your house price is rising by much.

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As if that wasn't bad enough, Aga also has a massive pension-fund headache. It has lots of retired pensioners to keep paying from the days when it was an engineering and metal-bashing company called Glynwed. Like many pension funds, Aga's is having to put aside more money to pay pensions as interest rates on the corporate bonds used as the benchmark keep on falling.

Aga Rangemaster (LSE: AGA)

The numbers involved make for scary reading. The last actuarial valuation said that the shortfall was £161m. Aga is now saying things are even worse. This is a big number when its market capitalisation (the sum total of all the shares in issue) is only around £50m.

So why would anyone in their right mind want to invest in a distressed pension fund with a fancy cooker business on the side? The main reason is because trading, for what is a decent brand, has got as bad as it can be. Aga carries high levels of fixed costs from its cooker and equipment manufacturing.

To use the City jargon, the company is highly operationally geared. This means that even a modest uptick in sales could lead to a big increase in profits.

That could be exactly what we see next. There are now signs that the business has stabilised. Aga's new products are cheaper to run and sales are rising. Rangemaster exports to Europe are growing, while there's still lots of potential to grow sales to American consumers. The company has also done a deal to sell cookers in China.

And while these cookers are expensive, they are quality products that are built to last. It might take a while, but it's quite possible that export orders and sales could start making the company some meaningful money in the years ahead.

City analysts expect profits to grow. They see earnings per share coming in at 9.2p in 2013, putting the shares on a modest price/earnings (p/e) ratio of 7.9 times. You won't get a dividend until the pension fund is sorted out, but at this level the shares are worth a gamble.

Verdict: SPECULATIVE BUY at 73p