Investment Column: Buy into this powerful investment case

Jardine Lloyd Thompson; John Menzies
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Our view: Buy

Share price: 264.3p (+7.1p)

International Power is one of those companies that is a staple of the FTSE100 and yet somehow manages to be largely unknown. It is a huge group: an independent power generator with interests in 45 facilities and related businesses around the world from Karachi to Massachusetts, including six in the UK. And it is doing remarkably well, if yesterday's interim management statement is anything to go by.

Recession may have taken a chunk out of demand for energy, but International Power says business is good and has raised its 2009 earnings guidance to last year's level. The chief executive, Philip Cox, said he now expects earnings per share to be broadly in line with 2008, and free cash flow to be significantly ahead of last year.

Part of International Power's secret is its scale. The US market – where it has 10 facilities – is having a torrid time. Gas prices have tumbled, demand is not improving, and the result for International Power is spreads and load factors in Texas that will come in lower than guidance as recent as August, although the position in New England remains in line with forecasts. But elsewhere there is a different story. Europe and Australia are both ahead of expectations, helped by sterling's weakness. And business in the UK in particular has been boosted by higher margins at the First Hydro plant at Gwynedd in Wales and the Saltend co-generation plant in Hull.

Yesterday's bullish statement sent the shares up sharply. Possible new projects in North Africa, Asia and the Gulf, make for strong growth prospects when world economies pick up again and power demand soars. Trading on just over nine times forecast full-year earnings while offering an attractive enough yield of about 5 per cent this year and next, we're buyers.

Jardine Lloyd Thompson

Our view: Sell

Share price: 446p (+2.8p)

It's an odd thing to say but an event causing a major insurance claim might actually benefit the industry. Rates nearly always harden in the aftermath, leading to better times in the long run. As it is, the slowdown has hit rates, and while we are on the road to recovery, there's no impetus out there for them to increase. This has hit the industry with the double whammy of low rates and low investment income and so low commissions for a broker like Jardine Lloyd Thompson.

The group's interim management statement didn't change the guidance given at the interim stage and said there should still be progress this year. So, the world isn't fall apart, but neither is there much to get terribly excited about. This follows through to the shares' valuation. They are trading in line with the US peer group (there aren't really any comparatives on this side of the pond) on a multiple of 13.5 times next year's results. That's not overly challenging, given that this falls to 11.7 times the 2010 figure and there is a healthy enough yield of 4.6 per cent, increasing to 4.9 per cent next year. But in a tough trading environment it is going to be a stretch for JLT to meet the forecasts for a big rise in profits for 2010.

For residents in the Southern US, the hurricanes staying away this year is good news. Not for JLT. Given uncertain prospects and an IMS that was hardly upbeat, we say sell.

John Menzies

Our view: Buy

Share price: 349p (+29p)

The future for John Menzies, the aviation services-to-newspaper distribution company, was looking rosy in March when its shares fell to a lowly 43p. Investors' concern over debt and the tanking aviation and media markets weighed on the price. But since then, it has staged a remarkable rally, soaring to just under 350p yesterday. Menzies has helped itself by keeping a tight rein on costs, paying down that debt and winning new aviation and newspaper contracts. The aviation division, which provides cargo services and passenger check-in for airlines, has won new contracts with Qantas, Air New Zealand and easyJet. John Menzies' newspaper arm has benefited from the collapse of rival Surridge Dawson, securing new business with News International and Associated Newspapers this year.

Yesterday, John Menzies delivered robust third-quarter figures and said its full-year results will "now be well above current market expectations". City analysts swiftly updated their spreadsheets and sent upgrades winging around the city, adding about 15 per cent to forecasts, which now predict pre-tax profits of £31.5m.

Despite the soaring shares John Menzies still only trades on a forward 2009 price to earnings ratio of 8.6. This leaves us to believe that its recovery still has wings, despite operating in two of the more challenging sectors over the short term. Buy.