Investment Column: Buy Reed for its recovery, not the rumours

Bodycote International; Walker Greenbank
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Our view: Buy

Share price: 563p (+13.5p)

On a quiet day for the market, the rumour mill took aim at Reed Elsevier. Talk on the trading floors has focused on whether the Netherlands' Wolters Kluwer has been lining up a bid for the UK listed publishing group, whose titles include The Lancet, New Scientist and Variety.

The company has declined to respond, but the general feeling is that there was not much in the stories, or the talk that Reed was considering a disposal. Rather, Reed has been trying to keep a low profile this year. It had all the headlines it needed in 2009, after dramatically axing its chief executive, Ian Smith, after just eight months. Mr Smith had had no previous media experience, and the chairman was quick to install Erik Engstrom, the head of the scientific publishing business Elsevier, when he thought the strategy was heading in the wrong direction.

Mr Engstrom has not been keen to step into the limelight and has focused on quietly reshaping the business. There will be a better indication of his success or otherwise in the management statement next month.

Over the summer, however, positive interim results drove the shares up, not least because of suggestions that advertising and promotional markets were stabilising. Elsevier, the most profitable part of the business, is seeing good momentum, as is Reed Business Information. However, the exhibitions business is under pressure and so is the LexisNexis database, which also provides content for legal and risk markets, although it has launched some potentially interesting new products.

The new boss looks a safe bet and although we can see few solid drivers for the shares in the meantime – beyond maybe some more takeover chat – a strong update next month could see another rally. At a price of just 12.7 times forecast full-year earnings, the stock looks cheap, and has a prospective yield of 3.7 per cent. In a recovering market, we say buy.

Bodycote International

Our view: Buy

Share price: 301p (+25p)

Some good tidings from Bodycote International, the engineering group, which yesterday said full-year profits would be at the top end of analysts' forecasts. The shares duly jumped, continuing an impressive rise over the past year which has seen the stock soaring by more than 60 per cent.

Of course, this is the sort of good news that gets some investors nervous that they may have missed the boat – especially with the order book looking short and visibility about what lies ahead low. Nonetheless, we're pretty impressed and even taking account of the gains, trading on 12.4 times 2011 forecast earnings, the shares sit at a slight discount to the sector. The dividend yield of more than 3 per cent is also healthy compared with rivals.

It's probably the case that the shares are approaching fair value, but we would suggest that there is still some juice left in the tank. So buy.

Walker Greenbank

Our view: Buy

Share price: 40.5p (+2.25p)

Walker Greenbank might not be a household name, but if you've bought wallpaper or printed fabrics from John Lewis, you've probably bought one of its products. The group has an enviable portfolio of brands, including names such as Harlequin and Sanderson, but has been struggling in recent years under a welter of debt.

That's largely now been dealt with and yesterday the company reported a strong set of interim numbers: revenue was up 15.6 per cent at £33.67m while pre-tax profits stood at £2.31m (up 306 per cent). Debt reduction has continued, while the group paid its first interim dividend for 13 years.

The shares have reflected the company's revitalisation, but with a revival in the popularity of wallpaper and the potential for expansion overseas now the business is fit and firing, there should be more to come from this fast-recovering firm. Buy.