Investment Column: Chemring offers strong defensive cover

National Grid; Young & Co's Brewery
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The Independent Online

Our view: Buy

Share price: 1613p (+4p)

Defence industry investors may have become a bit nervous in recent months. The reassuring news that the wars in Iraq and Afghanistan are in full swing has slipped off the front pages, to be replaced by embattled spivs and a maladroit journalist-cum-dancer. And the election of the change-promising President-elect Obama can hardly have helped matters.

But they should relax: the defence sector is still one of the strongest areas of the market, and with consumer spending expected to continue to fall yet further, buyers should be seeking sectors that do not rely on any kind of discretionary expenditure.

That is also why they should buy Chemring shares, assuming they are not averse to buying defence stocks. The group, which makes flares and other military decoys, said in a trading update yesterday that full-year numbers, due in January, would hit expectations and that its order book is up 26 per cent on this time last year.

For investors wanting to know about the risks, there are few. Yes, a full-blown recession could lead to a cut in government defence spending, but with high-profile cases concerning inadequate kit being used by soldiers in Helmand Province, it would be politically unpopular. Any troop withdrawal from Iraq is likely to lead to a boosting of numbers in Afghanistan.

The stock has outperformed the rest of the market by 27 per cent since the start of the year, and while it is not cheap, only a fool would favour a cheaper retail share over Chemring stock.

Watchers at Killick Capital argue that, trading on an October 2009 price/earnings ratio of 8.2 times, Chemring is compelling. They suggest that investors should also consider defence industry peer Cobham's shares, which have fallen from 200p to 160p since the start of November. In these times of economic woe, we would not bother distinguishing between the two. Buy.

National Grid

Our view: Buy

Share price: 680p (-10p)

The old saying that something is "as safe as houses" does not really wash anymore: anyone with a bevy of buy-to-let properties will tell you that. Perhaps instead the new mantra should be that something is as safe as National Grid. In a year, which has seen Wall Street banks going under, and companies facing ever greater debt refinancing troubles, National Grid has managed to issue £3bn of notes: its share price has hardly budged.

Every investor looking for a safe haven should have shares in the group, which runs energy networks in the UK and US. The company in its interim results yesterday said that revenues in the six months to the end of September were up by just under £2bn to £6.1bn, with operating profits breaking the £1bn barrier, up from £933m.

The company argues that it is low-risk, but that with a policy of hiking the dividend by 8 per cent per annum , investors are getting a growth stock too.

Analysts at Dresdner Kleinwort argue that: "the company has a fundamentally defensive business, and although no company is without risk in the current climate, we regard National Grid as a relative safe haven." The experts keep their buy rating on National Grid with a 840p target price. We would go further and argue that there is no compelling reason not to buy the stock. As and when the economy improves there will be shares offering more growth, but the market has not turned yet and investors would be well-advised to fill their boots with National Grid. Buy.

Young & Co's Brewery

Our view: Sell

Share price: 357.5p (-5p)

Buying an after-work beer, assuming you still have a job, is always a worthy investment. Investing in the company that makes it, however, could well be expensive. Young's, the brewer and pub chain, issued a mixed set of interim results yesterday saying that while first-half profits had soared by 116.8 per cent to £9.4m, the last seven week, since the end of the reporting period, have seen a like-for-like sales decline of 3.3 per cent. In the statement yesterday, the group said that "market conditions remain extremely challenging".

Analysts at Evolution argue that, trading on a March 2009 price earnings ratio of 14.1 times, "the valuation is high relative to its peer group and the wider small/mid cap market. However, Young's has minimal financial and operational gearing, has well-invested assets, and its customer offering is well placed to capture revenue from consumer trading down, especially food." They suggest that clients add the stock.

We reckon that Young's looks good in the sector, but would ask why a punter would buy the shares of a company that has lost 42 per cent of its value in the last 12 months, and expects things to get even tougher in the coming year? The answer, we would offer, is that they would not. Sell.

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