The big news in the world of individual stocks this week was the government’s announcement of how it plans to dispose of its stake in Lloyds Bank. There were mixed feelings about whether the shares represent good value, however, even though they will be made available at a discount to their market value, along with other incentives.
Tempus said investors should pre-register for the share sale of Lloyds Bank, pointing out the £300m being given away in terms of upfront discounts and loyalty payments makes it appear attractive. What is more, the backdrop for the sector has improved, with a line being drawn under PPI claims. The company trades at a lower P/E ratio than rivals and has a prospective dividend yield of 6 per cent by 2017, although there’s always the prospect of more mis-selling scandals coming out of the woodwork. Overall, the column concluded this seems attractive.
Questor took a more pessimistic view, however, due to concerns over the risk posed by bad debts, especially in light of rising interest rates, and a valuation that isn’t exactly cheap at the moment. The column urged prospective investors to consider more risk from impairment charges and a property market that is slightly weaker – there is much talk of dividends here, but it could be a long wait.
On Wednesday, Tempus tipped Robert Walters. The white collar recruiter posted a Q3 update on Tuesday, showing trading remained robust despite mounting fears over an emerging markets slowdown. The company saw fee income rise 6 per cent, while headcount has continued to grow, too. There is some concern over the valuation, given it trades at a 20 times multiple, but there is also a belief that it can continue to increase the number of clients it places. Tempus said that if past performance is anything to go by, the future looks bright.
Questor said investors should buy Melrose, a turnaround specialist for engineering and manufacturing companies. It is on course to return almost its entire market cap to investors in the next six months. This brings a successful investment period to a close, but the structure of this is rather complex – old shares are to be delisted and new ones will be issued – which the column admitted made the company difficult to value. However, it added that what investors are buying is an impressive management track record.
Questor said investors should hang on to Avon Rubber, a British manufacturing company which has performed a solid turnaround in recent years. Orders for gas masks from the Middle East and the police force in the US have put the company on course to deliver full year results ahead of expectations. With the stock trading on a 19 times multiple and offering a dividend yield of just 1 per cent, it may seem expensive, but this is the price to pay for quality.
Tempus issued a warning about Tesco yesterday. Interim results released on Wednesday showed operating margins of less than 0.8 per cent, when it used to aim for 5 per cent – so although the store may still look busy, it’s no surprise the numbers are struggling. The profits posted have been wiped out by servicing costs on its debt mountain, so the next dividends are some way off and there’s also the threat of litigation from investors who lost money on the back of the accounting scandal. Even after the bad run for the shares, they still trade on an earnings multiple well above 30 for the year – Tempus warned this is only really for gamblers.
Performance of stock over 2yrs
Source: FE Analytics
Tempus tipped packaging and paper group Mondi as a long-term buy earlier this morning. A month ago, there were suggestions that investors should book profits in the firm as excess capacity with some products threatened to cut profitability. It has navigated these hurdles well, however, with yesterday’s trading update offering a degree of reassurance that market growth could mop up any surplus production. Investors may be looking for excuses to cash out, but this is a solid business and with shares trading at a 15 times multiple, they are far from overvalued.
Questor wasn’t quite so optimistic, even though it admitted Q3 results were impressive. The column pointed out the balance sheet isn’t overly burdened with debts, while the policy of taking a long term view for borrowing means there’s plenty of time to accommodate rising interest rates. However, it said the shares are now on the expensive side and taking into account average earnings over the last five years, this puts the stock on a high 26-times multiple. This is regarded as being too high for such a cyclical industry – now is not the time to buy.
