The Investment Column: Bank on Barclays for a bargain

Slimmed-down GKN has become a buy; Don't dig into Anglo American just yet

Matt Barrett, the moustachioed chief executive of Barclays, has suffered all sorts of criticism for his impending move up to the chairmanship. Overpaid, perhaps. Poor corporate governance, certainly. But the reason investors haven't revolted is that, in the main, he has had a successful five years in the executive hot seat.

He has kept things ticking over nicely in Barclays' core high street banking operations, despite very tough competition. And he has bolstered other businesses in stockbroking, institutional fund management and investment banking. All these, and the famous Barclaycard credit cards division, are poised to expand abroad.

Half-year results yesterday were another record, showing a 25 per cent leap in earnings per share. There was a surprisingly good showing from the investment banking business Barclays Capital, and a 73 per cent jump in operating profits at Barclays Global Investors, the fund management business which specialises in equity market tracker funds and bonds. Profits in the retail banking division were 6 per cent higher at £1.2bn.

So far Barclaycard has weathered vicious competition for customers, the start of interest rate rises, and even Mr Barrett's own comments to the Treasury Select Committee that you'd be crazy to borrow on a credit card because it is so expensive. The business is likely to slow, but don't get things out of proportion. Barclays has more credit card business than the average but less mortgage business and, on balance, ought to outperform as rate rises put the brakes on borrowing.

The strong results yesterday came despite considerable investment in new staff, both in branches and across the other parts of the empire. The benefits of this investment will flow over the coming years. There are risks in Barclays' international expansion plans - it might overpay for acquisitions - but there are opportunities, too.

The crowning glory for this stock is the dividend. At the current share price, investors can expect a yield of almost 5 per cent, great considering the capital growth prospects. Trading at just eight times next year's anticipated earnings, the stock looks incredibly cheap. Buy.

Slimmed-down GKN has become a buy

GKN sold its half of the AgustaWestland helicopters business to Finmeccanica, its Italian partner, for £1.1bn in May and is now a much less interesting company. But its shares are much better value.

Instead of glamorous choppers, GKN is now 85 per cent-focused on the automotive market, making engine parts. This is precision equipment, tough to make, but the car makers have driven a hard bargain from suppliers and GKN's interim profits here were flat despite a 3 per cent rise in global car production. There must be concern, too, that car sales will fall as interest rate rises make consumers more cautious.

The AgustaWestland sale will cut GKN's earnings per share over the next couple of years, but the company will buy back shares to mitigate the effect. It also frees up cash to spend on acquisitions. Yesterday's agreement to buy the the Mexican drive shaft business Velcon was in keeping with its stated intentions: a handy bolt-on, rather than a transformational deal.

Most happily, the new slimmed-down GKN is a much more attractive morsel for an international predator. The introduction of a bid premium into the share price should offset worries over the global car market. We said hold a year ago at 234.5p, and now think the stock, at 223.75p, is a buy.

Don't dig into Anglo American just yet

Anglo American has turned base metal into shareholder gold this year. Record or near-record selling prices for copper, nickel and zinc have combined with increased mining production to generate record profits.

The world's largest mining group, Anglo American has assembled a mighty portfolio of assets across the globe, both wholly owned and through large shareholdings in Anglo Gold, Anglo Platinum and the diamond group De Beers. They span base, precious and ferrous metals, industrial minerals, coal and paper and packaging.

With earnings from base metals increasing sevenfold in the first half of the year, the group as a whole managed earnings (after tax, but adding back goodwill) of $1.3bn (£0.7bn), up 52 per cent. It is testament to the Anglo American strategy of continuous investment across the economic cycle, which meant more mines coming on stream at the right moment to take advantage of recovering prices. As well as lucking out with commodity prices, the company has squeezed cost savings from closing plants, especially in its European paper business, where the outlook is least rosy.

The only big negative has been that mines in its native South Africa proved relatively costly to run because of the strength of the rand.

Demand for Anglo American's products will stay strong. Despite a slowdown, the Chinese industrial revolution is set to continue and the world economy looks in rudish health. But demand for Anglo American shares is less assured. At 1,189p, they are down 7 per cent since we said avoid in February, but the dividend still yields only 2.6 per cent. There will be better times to back Anglo American's unique brand of alchemy.

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