The Investment Column: Best to wait and see on Reuters

Buy Provident for its potential overseas - Domino's delivers a tasty long-term growth story
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The Independent Online

Tricky game, managing the City's expectations. Reuters, which supplies the financial services sector with news and information, sparked alarm yesterday by admitting that the trading environment was not picking up as rapidly as it had been suggesting just a few months back.

Tricky game, managing the City's expectations. Reuters, which supplies the financial services sector with news and information, sparked alarm yesterday by admitting that the trading environment was not picking up as rapidly as it had been suggesting just a few months back.

It seems that after a good start to the year, with momentum building up, things started to slow down again in late May and June. Key market indicators, such as stock market trading levels, mergers and acquisitions activity and flotations, have all sagged.

The upshot of that is not that Reuters will miss its guidance for the year but that it is unlikely to beat it - as many in the City had come to expect.

Second quarter revenues were down an underlying 6.2 per cent, the company said. That's good news. It was the third quarter in a row in which the rate of decline had slowed. Before that, things had been getting rapidly worse for Reuters on the revenue front for three years. The company predicts that the third quarter of 2004 will see a fall of 5 per cent, while the last quarter would be better still.

Although this is clearly progress, the market was not satisfied and the shares closed down 5 per cent at 307p. The news pushes out the question of when Reuters revenues might actually see positive territory again. The company was giving no guidance for 2005. Optimists still maintain that growth should kick in during the later half of 2005. Others may not now see that happening until 2006.

Reuters' profits are clearly benefiting from the savage £440m cost savings programme that is now halfway complete. It is bringing a host of new products on the market that ought to enable it to fight its arch-rival Bloomberg much more effectively. However, the main problem is the external environment, about which the company can do nothing. Although the shares offer a respectable 3 per cent yield and trade on 15 times 2005 earnings, investors should wait till we see whether June was a blip before buying.

Buy Provident for its potential overseas

Provident Financial is not a loan shark. Discuss.

The group is one of the UK's biggest "sub-prime lenders", offering credit at high interest rates to those who find it impossible to get a loan or a credit card elsewhere, and collecting repayments door to door. It is a responsible lender, it says, and its customers know what the terms and conditions of their loans are and come away highly satisfied with the service, thank you very much.

The UK doorstep lending market is being investigated by the Office of Fair Trading after a consumer group complaint, and there will be a parliamentary investigation in the autumn, too. This increases the risks to Provident's business and damages sentiment towards the shares, but it is difficult to see any major changes to the regulatory regime. If the Government had wanted to, say, set a cap on credit interest rates, it had the opportunity to do so when it recently reviewed consumer credit legislation.

This part of Provident's business is going backwards at the moment, as is its motor insurance division and, now that higher interest rates are dampening demand for used cars, so is its Yes car credit business.

But nascent home credit businesses in eastern Europe and Mexico are growing fast, keeping group profits on an upward path.

Investors get a 6 per cent dividend yield, which should tide them over during a couple of years of pedestrian profits growth, before the international division becomes a growth engine for this company in the later part of the decade. Buy.

Domino's delivers a tasty long-term growth story

Domino's Pizza delivers. Yet again, the home delivery group has posted record results, ahead of forecasts, and a tasty dividend increase of 67 per cent. Franchises are opening across the UK at a rate of almost 50 a year, and there are now 337 outlets catering for those of us too pressed for time, too lazy or too rubbish in the kitchen to cook our own dinner.

The Domino's you can invest in on the London stock market is the company holding UK and Ireland rights to the brand, established in the US in 1960. The first UK Domino's opened in 1985 and although the most lucrative urban locations have been colonised, newer outlets at least benefit from brand recognition. Planning rule changes have made finding new sites tougher, but Stephen Hemsley, the chief executive, thinks Domino's can get to 800 outlets before reaching its limit.

The company plans a modest investment in a fourth distribution centre, and is also always sprucing up its stores. But it is generating far more cash than it needs to invest, and there is consequently the prospect of share buy-backs as well as further dividend rises.

We said buy the stock at 98.5p last year. At 225p, a much richer valuation could hold them back for a while but investors still have a long-term growth story to get their teeth into.

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