The Investment Column: Wolseley has been building on a solid base

Bloomsbury Publishing; FDM Group
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Our view: Buy

Current price: 884.5p (+ 2.5p)

The plumbing and building supplies group Wolseley has gone from darling of the large caps to the market looking like it expects a worst-case scenario in a very short period of time. The stock has lost more than 35 per cent of its value in the past three months and now trades at a three-year low.

It is true that the US housing market and weak dollar are major concerns as the company generates 65 per cent of profits on the other side of the pond. Some of the decline in its value can be put down to profit-taking on the back of a substantial bid premium that had been priced into the stock. It was rumoured to be the focus of a private equity bid, before the credit market turmoil effectively put the kybosh on it.

Despite caution expressed by the company – and rightly so – over the housing market and the weak dollar, are things really that bad? Even with the dollar headwind, the company is still growing, and it remains comfortable with forecasts for the current year and beyond. Should the US housing market recover, there will only be an upside.

Wolseley has spent most of the past five years on an acquisition spree, and while it carries a hefty burden of debt it remains highly cash generative. It currently has approximately five times interest cover, enough to ensure a decent night's sleep for most finance directors. The acquisitions, almost 100 of them, have mainly been much smaller bolt-ons, and as a result the company has also had to spend time and money integrating the businesses. Last week alone, it announced five bolt-ons for £87m.

It could be worth waiting to see the full-year numbers next week. The broker consensus is pre-tax profits of about £767m, with that figure rising to £861m in 2008. Earnings per share are predicted this year at 88.47p. With a solid upside to the valuation, and for a company that has a strong track record, it looks a worthwhile bet in the long term.

Bloomsbury Publishing

Our view: Hold

Current price: 175.25p (+4.25p)

So the tale of the boy wizard is finally over. The publication of the 7th instalment in JK Rowling's phenomenally successful series, Harry Potter and the Deathly Hallows, marked the end of an era for its publisher, Bloomsbury, who famously signed up the author on the recommendation of chairman Nigel Newton's eight-year-old daughter.

But Mr Newton was at pains yesterday to point out that Harry Potter will be working his magic for some time, stating it will be a big book for many years to come, which, of course, means a steady stream of revenue for the publisher. "The world loves British children's classics," he said. As of 8 September sales of the 7th book were already 17.6 per cent ahead of sales of the 6th book, while export sales were ahead 31.4 per cent. Children all around the world have shown themselves unable to wait for a translated version of the book and the English original has been flying off the shelves.

However, it is not all just about Harry. The company has done much to ensure that life will go on without tales from Hogwarts. In the first half of the year it had 34 bestsellers, including William Boyd's Restless, which got a boost from featuring in the Richard and Judy book club, A Thousand Splendid Suns, by Khaled Hosseini, and How We Built Britain, by David Dimbleby. Bloomsbury is also investing in cookery titles, with books from Hugh Fearnley-Whittingstall and Heston Blumenthal, and is expanding its digital content. Yesterday it reported an 8 per cent drop in first-half profits due to marketing and administration costs in relation to Harry Potter. It is the second half that will benefit from Potter sales, but even so revenues climbed 36 per cent. With shares trading at under 16 times forecast earnings, they remain good value. Worth holding.

FDM Group

Our view: Buy

Current price: 127p (+2p)

The prevailing wisdom about the recruitment sector has always been that when an economic slowdown bites it is generally among the first sectors to feel the pinch. But that is not necessarily the case – particularly when it comes to troubleshooting and temporary placements. FDM Group specialises in both, and looks like a good value play in what has been a strong market in the past two years.

Aim-listed FDM is unique in the staffing market – it recruits and trains IT specialists, guaranteeing them two years of work once the training is completed. It then hires them out to customers as high-margin consultants known as Mounties, a throwback to Mountfield, the company that designed the system which FDM acquired in 1995.

Yesterday's interim results show that the business model is working well, with first-half pre-tax profit up 45.2 per cent to £1.83m on the back of a 15.7 per cent jump in revenue to £24.4m. Net fee income, the most common measure used to judge the performance of recruitment stocks, rose by 29 per cent to £5.1m.

If we go into a recession permanent recruitment is likely to suffer, but companies are happier recruiting temporary staff in a slowdown. FDM offers defensive qualities with a strong growth record – during the last major market sell-off, FDM still managed to grow earnings. The stock trades at a substantial discount to the rest of the recruitment sector, and at just 9 times forecast 2008 earnings offers good value and a growing dividend into the bargain. Buy.