The Investment Column: Housing slowdown makes Bellwaylook a bad bet

SSL International; St Ives
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Our view: Hold

Current price: 1047p

If the headlines are to be believed, the housing market is deep in crisis and we are all doomed. Well, maybe not quite doomed, but not far off it. But nine times out of ten the Armageddon scenario does not happen, so, after heavy losses in the last six months, is it time to take a punt on a house builder?

Full-year results from Bellway, the mid-cap house builder, were marginally better than forecasts. Pre-tax profits rose by 6.4 per cent to a record £234.8m on the back of a 7.3 per cent jump in house sales to 7,638 units. Revenue rose by 9.2 per cent to £1.35bn, and it already has £667m of sales booked in for the current year, 57 per cent of planned output.

Bellway has an excellent record of delivering growth and its shares, priced at just 7.3 times forecast 2008 earnings, offer good value. A forecast dividend yield of 4.2 per cent is also attractive to income seekers, and the balance sheet looks strong, with just under £180m of debt and 14 times interest cover.

The problem is that macroeconomic factors are likely to have more influence on the shares in the short term. The housing market is slowing down, and the fallout from the collapse of Northern Rock is still to play out. Although Bellway was correctly cautious in its 2008 outlook, it looks more a question of how bad will the housing recession be rather than whether there will be one.

Investors already in the stock have lost almost 40 per cent of their money since the stock peaked in April. The valuation would suggest that most of the downside has been priced in, and given the decent numbers and strong yield, they should hang on. But for potential new investors, there are better opportunities for growth elsewhere.

SSL International

Our view: Take profits

Current price: 518p

Any reader who took our advice four months ago and bought into the condom and foot-care products manufacturer SSL International owes us a beer. The shares have rallied impressively, adding almost 20 per cent against a flat wider market.

Yesterday's interim trading statement should provide more encouragement for investors ahead of results on 20 November. First-half sales are expected to come in at £260m, well ahead of the £236m in the same period of 2006, with the company expecting to report double-digit growth, in line with forecasts.

Not surprisingly, the best performance has come from the two premium brands, Scholl foot care and Durex condoms. Durex condoms are proving very popular in Eastern Europe, and with little exposure to the potentially lucrative growth markets of China, India and Russia, there is plenty of scope for growth to maintain the current momentum.

Some City observers are concerned because the shares are valued at a premium to most of its peers. That is undoubtedly true, and the shares trade on more than 24 times forecast 2008 earnings, leaving no margin for error. There are reasons that the shares are expensive – SSL operates two premium brands with excellent growth potential, both in established markets and emerging markets.

However, at this stage investors must ask themselves if any bidder would pay a significant premium to the current price in order to buy the company. The chances are that in the current market the answer is probably no, and given the outperformance the stock has achieved in the last four months and its expensive rating, investors should leave something in it for the other bloke and bank their profits.

St Ives

Our view: Buy

Current price: 237.75p

St Ives, an independent printing group, is placing its faith in a targeted, complex service and state-of-the-art digital operations as it looks to differentiate itself in a crowded sector. The company is optimistic it will continue to grow after a refocusing drive, although it admits the market remains challenging.

Yesterday, the company reported solid full-year results, with pre-tax profits up from £24.2m in 2006 to £27.6m this year, with a boost in turnover from £382.5m to £425m. The results were strongly driven by its point-of-sale and books divisions, which are expected to continue their strong performance this year.

The management deserves credit for the results, as it realised the need to refocus over the past few years. It consolidated operations in the US, sold most of its struggling financial printing business and bought Service Graphics, the large format graphics printer.

Despite solid returns this year, there are longer-term concerns over its magazine division, which prints the UK runs for titles including The Economist, as well as the loss-making Direct Response business, which has been hit by over-capacity and price pressure. Added to that, the sector's performance is closely related to the economy and consumer confidence.

The stock trades on a forward multiple of 10.7 times 2008 earnings, and pays a yield of 7.4 per cent, and undoubtedly offers good value to growth and income seekers alike. Buy.