The Investment Column: Investors should ride out the storm with FirstGroup
Fenner; Tangent Communications
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Your support makes all the difference.Our view: Hold
Current price: 745p
It is hard to get too excited about investing in trains and buses. Perhaps that is being grossly unfair – after all,anyone buying into FirstGroup four years ago has made a return of over 200 per cent on their initialinvestment.
While yesterday's results were solid if not spectacular, the company did make some cautious noises about its outlook. In the first half, FirstGroup recorded revenues of £1.77bn, marginally ahead of the previous year, although a strong performance in UK rail and bus operations led to a 12 per cent jump in operating profits to £103.1m, while pre-tax profits rose by 23 per cent to £71.3m.
Despite the numbers there are several potential headwinds that FirstGroup must overcome if it is to maintain its momentum. First, with oil rapidly approaching $100 a barrel, the company must hope that fuel prices stabilise because its ability to pass costs on to customers is limited by industry pricing regulations. Second, it must generate a minimum of its targeted $70m in synergies arising from the $2.8bn acquisition of the US group Laidlaw, completed last month. Third, it must prove that the acquisition ofLaidlaw was priced right and will work against the expected backdrop of continued dollar weakness.
The jury must remain out on all three key issues. Laidlaw may indeed still "transform" FirstGroup's business, as its management has claimed, and the company's UK businesses look to be in a strong position, but it is too early to draw any conclusions.
For new investors there are too many questions still to be answered to warrant getting excited about FirstGroup, and with the wider market looking vulnerable to more falls on the back of the banking crisis, now may not be the time to take the plunge. For investors already in the stock, there is enough good news in yesterday's results to warrant holding on.
Fenner
Our view: Hold
Current price: 263p
For most people the closest they will get to a conveyor belt is while paying for the weekly shopping or fetching their luggage at the airport. But there's money in conveyor belts – and at the hi-tech industrial end of the market, where Fenner operates, plenty of it.
The shares have been among the best performers in the smaller cap stocks over the past few years, in line with several of their engineering peers. But while yesterday's full-year results were impressive, with pre-tax profits up 15 per cent to £33.6m, an excellent performance against broadly flat revenue of £380.8m, the market was expecting the company to report a solid year of growth.
Fenner operates two main businesses – conveyor belt textiles, primarily used in heavy industries such as mining and oil, and advanced engineering products, such as seals and advanced polymers. Both have been driven by the surge in natural resource investment and the construction of coal-fired energy plants, and as there is little evidence that demand for commodities is likely to drop soon, the long-term future for Fenner looks exciting.
However, in the shorter term the weak dollar and concerns over the credit markets are likely to mean that the shares will plateau rather than continue their recent outperformance.
The shares trade at 16.7 times 2008 forecast earnings, a full price for an engineer. Given its prospects and momentum, Fenner probably deserves to trade at a premium, but for longer-term investors, banking some profits while the stock remains close to a multi-year high is not a bad idea without exiting the stock fully. For everyone else, hold.
Tangent Communications
Our view: Buy
Current price: 13p
Even as advertising budgets continue to migrate from traditional media to the ether, there is still a long way to go before the electronic word overtakes the printed and televised version. But it will happen, and Tangent Communications is enabling corporations to embrace internet marketing.
Yesterday's full-year results from the Aim-listed group prove how lucrative online marketing can be when it is done right. Although in the grand scheme of things the numbers are still small, profit before tax soared by 169 per cent to £1.42m on the back of a 121 per cent jump in revenue to £8.74m. The company also retains plenty of cash – £2.3m, more than 10 per cent of its market capitalisation.
So far, the company has managed to develop an impressive list of blue-chip clients, including Greene King, Wolseley, KPMG and Halifax. In total it has more than 3,000 customers, and its proprietary technology is driving more than 70 per cent of profits. March's £4.5m acquisition of direct marketing and digital print business Ravensworth has proved to be a canny deal.
As always, this kind of stock is not for the faint-hearted. But Tangent is making real money, and based on forecasts from the broker Collins Stewart it trades on under 10 times forecast 2008 earnings not including its cash pile. Buy.
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