The Investment Column: Compass is heading in right direction despite price worries
Tullow Oil; Dimension Data
Your support helps us to tell the story
From reproductive rights to climate change to Big Tech, The Independent is on the ground when the story is developing. Whether it's investigating the financials of Elon Musk's pro-Trump PAC or producing our latest documentary, 'The A Word', which shines a light on the American women fighting for reproductive rights, we know how important it is to parse out the facts from the messaging.
At such a critical moment in US history, we need reporters on the ground. Your donation allows us to keep sending journalists to speak to both sides of the story.
The Independent is trusted by Americans across the entire political spectrum. And unlike many other quality news outlets, we choose not to lock Americans out of our reporting and analysis with paywalls. We believe quality journalism should be available to everyone, paid for by those who can afford it.
Your support makes all the difference.Our view: Buy
Share price: 358p (+15.75p)
Richard Cousins, chief executive of the catering giant Compass, does not like making predictions, but he is barely able to contain his excitement about what he thinks will be a good second half to 2008.
Furthermore, he is "optimistic" about the longer-term prognosis, which may seem unwise, especially as inflation in the group's main business, food, is soaring off the scale. It is a worry, admits Mr Cousins, but he argues that the company is mitigating increases in food prices by cutting costs and pulling out of non-core businesses: the company has closed operations in 30 countries.
All this appears to be working. The company posted a stellar set of first-half numbers yesterday, beating analysts' expectations. Pre-tax profits were up 29 per cent, and the group reckons it will hit its target of 5 per cent organic revenue growth for the foreseeable future. Furthermore, Mr Cousins says that more inroads into Compass's £10bn costs bill can be made.
Today's announcement had the analysts out of their seats, with those at Seymour Pierce upgrading the stock to hold, but stressing that the company's improvements are already priced into the shares, which have risen 12 per cent this year.
Hogwash, retort those at Cazenove, who argue that the group, which is trading at 17.1 times earnings forecasts for this year, comes at an 8 per cent discount to its major rival, France's Sodexho.
Investors sitting on the fence might be encouraged by the group's plans to buy back £400m worth of shares in the next 18 months, which can only bode well for the stock price.
While the group is exposed to food inflationary pressures, it has done a good job so far of mitigating that problem. Mr Cousins points out that not every foodstuff has been subject to the same price hikes and that the group is carefully "massaging the menu" to avoid the costliest items; so far, he says, customers have been "sensible" about accepting price increases.
Compass is a defensive stock and if its plans for the future work out, investors will be laughing. Buy.
Tullow Oil
Our view: Buy
Share price: 902.5p (-2.5p)
What a week it has been for Tullow Oil. Last Wednesday investors were popping the champagne corks as the shares rocketed by 24 per cent after the group announced a major new find off the Ghanaian coast.
The stock reached a peak of 943.5p at the height of the hullabaloo, and even though the shares are off a bit since then, investors thinking they may have missed the boat could yet get a chance to join the party. Analysts at Evolution say that there is more good news to come, arguing that the shares have a fair value of 1129p because of "new prospects identified in Ghana and the remainder of the group's exploration programme over the next 18 months". This, they say, represents the risked fair value. On "unrisked potential", shares could reach £19, and while Evolution accepts that this "may seem far-fetched" they point out that the shares were trading at just 554p last September.
Investors do need to be careful not to be swept away on the good news coming from Tullow. After all, this is a high-risk sector, as Citigroup points out. There is a danger of being caught on the bandwagon, say analysts at Goodbody, who reckon that the "current valuation is substantially up with events," even though Tullow could, and some say is likely, to trumpet further finds.
Most observers think there is room left and the stock is not yet fully valued. Watchers at RBC still have the group as its top pick in the sector, despite the gains already made.
With a plethora of announcements to come during the rest of the year, investors can be fairly confident to hear some good news. If it is as good as last week's, today's buyers will be quids in. Buy.
Dimension Data
Our view: Hold
Share price: 52.5p (+1.5p)
Dimension Data posted cracking figures yesterday, with analysts cooing over the group's 71 per cent rise in first-half profits.
It has been a great start to the year, with the house broker Investec predicting that the shares will reach 59p, saying that the group, an IT services provider, is outperforming "on every level". They say that the shares trade at 17 times earnings, falling to 14 times next year. This is "attractive," they say, "given the material earnings growth we continue to forecast".
However, not all are happy. Watchers at Evolution say that it is very tricky to predict the group's future, and that anyway, it trades at an undeserved premium to its sector. They reckon it is difficult to accurately identify the group's real price earnings ratio because of several mitigating factors, but their best estimate is about 13.5 times; a premium to the IT sector, which generally trades on about 11.5 times. The watchers are also concerned about visibility of Dimension Data's forward order book.
Investors should be wary of too getting carried away by a good set of figures. Hold.
Join our commenting forum
Join thought-provoking conversations, follow other Independent readers and see their replies
Comments