Investment Column: A wise investor would buy Sage

Tullow is a buy thanks to its new discoveries; Dip in Greggs' price is a chance to make dough
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Sage, The FTSE 100 technology stock that specialises in accounting software for small- and medium-sized companies, delivered another strong set of numbers yesterday.

Sage, The FTSE 100 technology stock that specialises in accounting software for small- and medium-sized companies, delivered another strong set of numbers yesterday.

However, there is no accounting for the market's taste when it comes to what counts as a growth stock.

In a year-end trading update, Sage showed that it has capitalised on a strong first half by delivering forecast-beating second-half profits. All told, it produced full-year group revenues up 29 per cent to £688m, organic revenue growth of 6 per cent and a 20 per cent increase in pre-tax profits to £181m. Earnings per share grew 21 per cent to 9.9p. But its shares barely moved, closing up a measly 0.4 per cent at 172p, trading where they were a year ago and implying a distinct lack of progress.

So what is a company like Sage to do? Well, one answer is that its shares might already be fully valued. But compared with its software peers it trades on a big discount to Microsoft, SAP and Intuit. Its rating for the 12 months just ended is 16.3 times earnings compared with 26.9 for SAP and 20.45 times for Microsoft. For the full year to the end of September 2005 the rating for Sage falls to something close to 15 times.

One reason for the discount is that one or more of these larger rivals could suddenly turn on Sage and try to steal its business. However, having firmly established its name among smaller companies for reliable accounting and business management software both in Europe and the United States, its rivals would have to embark on a price war to capture the market and frankly, have probably got better things to do.

A better explanation is that investors are waiting to see better evidence of sustained economic recovery from the United States, which accounts for 40 per cent of profits. Sage's broker, Deutsche Bank, reckons organic growth there is flat. However, with a good geographic spread to its business to help counter any US sluggishness, the shares look cheap. Buy.

Tullow is a buy thanks to its new discoveries

Tullow Oil, the oil and gas explorer/producer, yesterday announced its sixth discovery of the year, in a field in which it has a small stake - in deepwater between the republics of Congo and Angola.

Earlier this year, there were discoveries in Bangladesh, the North Sea, Gabon and Congo.

Aidan Heavey, the chief executive, said: "This, combined with our ongoing success in our development drilling programmes, continues to demonstrate that our strategy of adding value through exploration and exploitation of existing reserves is working."

A detailed operational update put out by the company yesterday was seen as positive. As well as the new discovery, it revealed that production had been raised at a number of African fields.

Tullow is active in 16 countries, in Africa and South Asia, and the North Sea. It holds 90 exploration and production licences. Of these, most City interest at the moment is focused on high-risk wells in Mauritania and Uganda.

The shares lost 3.25p yesterday to 135.5p, but that is still close to an all-time high of 152p seen recently. They trade on a forward multiple of 18, which is not bad, but the real value here is in new discoveries. With such a spread of activities, Tullow is well positioned. Buy.

Dip in Greggs' price is a chance to make dough

Greggs the baker found the going sticky last summer when the mercury soared and people stopped scoffing so many sausage rolls.

Damp weather equals rising dough for this company, so there was little surprise yesterday when it said like-for-like sales had increased by 5.4 per cent during the past 11 weeks. That they have slowed since the 7.4 per cent reported at the start of its second half reflects initial easy comparisons rather than anything more sinister.

Barring the sausage roll incident, when hot weather knocked the bottom out sales, the group is a constant outperformer, so the handful of upgrades yesterday were barely noticed by the market, which had chased the stock higher during the past fortnight.

Greggs' management team is well respected for using their loaf, so the City is happy enough with its plan to venture away from the group's northern heartland. It's early days, but so far Greggs' plans to increase its estate to 1,700 from 1,200 by the end of the decade are progressing well. It has added 24 new shops, net of closures, since its year begun and expects to exceed its stated target of 30. It is particularly targeting the Midlands and the South-east.

The group flagged up the perils of inflation, with higher energy and protein prices feeding through to a 2.4 per cent rise in selling prices - that's 1p on a sausage roll or 2.5p on a sarnie. But the increase is not high, historically, so didn't worry analysts. The 74p fall in the share price to 3,651p looks like a buying opportunity with the stock trading on an undemanding price-earnings ratio of 14 times, given the growth prospects.