The Investment Column: Reed Elsevier is worth holding as it can weather media sector slump

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The Independent Online

After a belting start to 2005, investors in Reed Elsevier, the Anglo-Dutch publishing group, have had rather a disappointing ride over the past nine months.

While the FTSE 100 index has bounded ahead since April, Reed, along with much of the rest of the media sector, has struggled to maintain its position, with its shares now trading some way below their March highs of 566.5p.

Reed makes its money publishing books and journals - and providing information databases - for the educational sector, the legal and medical professions, and parts of the business world.

Although some fragility in parts of the global economy have created tough conditions for Reed this year, the market's lacklustre sentiment towards the stock does not tell the true story in terms of the company's performance.

Growth across all four of the group's main divisions - Education, Science & Medical, Legal and Business - has been positive this year, with group earnings on course to deliver double-digit growth for 2005, and probably for 2006 as well.

Furthermore, with a well-diversified portfolio of businesses, both geographically and sectorally, the company remains well positioned to weather the odd upset in the global publishing industry.

This was proved last month as Reed downgraded its profits growth forecast for its education division by a hefty 7 percentage points, after the slow take-up of its US range of supplementary teaching materials. Although the shares took a knock, they have already made up most of this fall in the weeks since. With the stock now trading at around just 14 times next year's earnings, Reed is cheap compared with its rivals, such as Pearson. With a good level of pipeline business, its medium-term prospects look strong.

But the short-term prospects for the share price are likely to be shaped by what chief executive Crispin Davis elects to do with the company's spare cash.

Reports in the Dutch press yesterday suggested he was looking at an acquisition, which would certainly knock the shares. But handing back some of the cash to shareholders has not been ruled out.

Waiting for some clarity over the cash pile may be the order of the day for now. Hold.

Merged Group 4 is a secure bet

When Securicor merged with Denmark's Group 4 Falck last year, the City was promised that the combined group would generate cost savings of £30m per year, enjoy an organic growth rate of 6 per cent for the medium term, and that the two companies would be fully integrated by 2007.

Yesterday's trading statement showed that Group 4 Securicor has delivered on all three promises. In fact, it has managed to fully integrate the two businesses 12 months ahead of target.

The international security giant now looks to be in rude financial health and achieving solid growth. At a group level, organic growth is running at 7 per cent per year.

Group 4's manned guarding business, which accounts for 60 per cent of the company, is leading the way, particularly in the US. There it notched up 10 per cent growth.

Group 4's cash services unit, which transports billions of pounds daily for banks, building societies and retailers, has seen trading improve in the second half of the year. Shares in the security group trade at 13.5 times forecast earnings for 2006, which is a discount to its biggest rival, Sweden's Securitas. This discount is unwarranted, especially because of Group 4's exposure to emerging markets. It operates in more than 100 countries, including India and China.

These days, the company gets 15 per cent of its business from developing countries and enjoys 20 per cent annual growth in such markets, making the stock a safe bet. Buy.

Air Music & Media off key as it slides into red

Air Music & Media struck another bum note with investors yesterday. The shares were marked 0.8p lower to 2.12p after the distributor of cut-price DVDs and easy listening CDs slid into the red and unveiled a boardroom shake-up.

The market value of the AIM-listed Air has now slumped about 70 per cent this year to a shade north of £15.2m.

The company blamed a hefty £1.4m hit from restructuring its headquarters and exiting its loss-making Hollywood DVD business for its £1.2m loss between April and September. That was against a £560,000 profit last time.

Hollywood used to sell bundles of DVDs that retailers gave away with players - a practice that died as the price of machines fell.

John French, the serial entrepreneur, said he would step down as Air chairman when a replacement had been found. Two other directors will also go.

Mr French reckoned the Hertfordshire-based group, which is on the lookout for possible acquisitions, was well placed to bolster profitability by scooping new customers.

Sales almost quadrupled to £29.8m and pre-tax profits before exceptional charges were 41 per cent better than last time. Underlying pre-tax profits of £4.6m are slated for the full year. Not surprisingly, the company thinks its share price is out of kilter with its prospects.

But Air admits that it's still too soon to say how it will perform over the crucial three-month Christmas period. That is likely to account for about 30 per cent of annual sales.

It remains cautious. So too should investors. Avoid.

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