Investment Column: Autonomy proves worthy of its lofty rating

Domino's Pizza; Games Workshop


Our view: Buy

Share price: 1558p (+90p)

Last year we argued that the despite another stellar set of results from Autonomy, investors should wait for signs of softening in the share price before jumping in.

The IT group, whose software allows clients to track emails, has been one of the best performers on the FTSE 100 in recent years, driven largely by the regulatory nature of its products. The shares, incidentally, have showed no let-up since we last looked at them.

But now there are concerns among analysts that the squeeze on many companies' procurement departments will slow the sales of Autonomy's latest products. Moreover, the stock's unchecked rise (it traded at just 158p five years ago) means that as well as being one of the best performers on the index, it is also one of the most expensive, trading on a prospective price-to-earnings ratio of nearly 30, way more than rivals such as Sage in the UK, and international groups, such as SAP. The lack of a dividend does nothing for the investment case, either.

However, despite these criticisms the group thunders on, and yesterday it issued a trading statement saying that it is on track to hit analysts' full-year estimates. Mike Lynch, chief executive, argued that Autonomy showed significant growth, increased customer penetration and new product development against an extremely tough general economic environment. It has also outperformed its peers.

Given the way the shares have performed, there is always the risk that investors are buying the stock at the top of the market. On the other hand punters should be encouraged to back winners. On an earnings-per-share basis, for example, Autonomy outperforms both the European and global software sectors according to house broker UBS.

The analysts at Panmure Gordon admitted yesterday to losing their bottle and going soft on Autonomy at the end of last year. And while we're on the mea culpas, we were perhaps guilty of this too. But we don't intend to make the same mistake twice. Time to get back into Autonomy. Buy.

Domino's Pizza

Our view: Buy

Share price: 304.65p (-4.7p)

There seems to be no lack of appetite for Domino's Pizza from customers in the UK and Republic of Ireland. Despite being up against buoyant sales last year, Domino's delivered tasty like-for-like growth of 8.6 per cent at 501 mature stores for the 13 weeks to 27 December. The company posted the same increase for the corresponding period in 2008. That's impressive growth by anyone's yardstick.

The strong final quarter helped Domino's to outperform its own internal like-for-like sales forecasts for the year and improve its margins. It also opened a record 55 stores in 2009, which was also more than anticipated.

But that's not all. Domino's has had an online presence for a decade but e-commerce sales jumped by 40.4 per cent for the year, although this was down from the stunning 73.7 per cent growth in 2008. All this means the pizza maker was able to say full-year 2009 profits will be "comfortably ahead of current City expectations".

Investors may want to chew over the fact that Domino's shares are still pricey and trade on a price-to-earnings multiple of 21.2 times full-year forecast earnings. Given that, we would not expect an explosive 2010 for its shares, but management's track record of delivering the goods – and pizza – during the recession means a slice of Domino's is recommended for long-term investment plans. Buy.

Games Workshop

Our view: Hold

Share price: 332.5p (+76.5p)

Games Workshop's chaos warriors continue to storm the stock market. Yesterday the company produced a trading update predicting that profits will be £5m better than City forecasts, an impressive performance by anyone's standards. The shares duly responded by shooting up 76.5p.

Games Workshop now looks to be through the first phase of its turn-around and can go on from here. It's kept tight control of costs, and continues to succeed by paying close attention to its customers, an oft-lampooned group who enjoy painting miniature soldiers and then staging wargames with them. We said hold at 309p in July and since then the shares have drifted badly, only rising above that level after yesterday's barnstorming trading update.

It's not all good news. There was a note of concern about recent sales in the trading update. And the company will need to ensure that it does not get complacent. But there is not too much sign of that and on 13.5 times forecast 2010 earnings, the shares, even at the new level, are not unfairly priced. We would continue to hold, although we would not put investors off from buying more.

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