Investment Column: Cobham is more than just defensive
Immunodiagnostic Systs; Eckoh
Tuesday 13 April 2010
Our view: Buy
Share price: 274.6p (-0.7p)
At first glance, two concerns spring to mind when looking at Cobham, the defence and aerospace electronics group. First, the world economy seems to be recovering from the financial crisis and traders are increasingly on the prowl for companies that track the rhythms of the economy. Cobham isn't one of them. Like others in the sector, it is a defensive play, which is a great attribute but means that the growth of the shares could be pedestrian as the recovery takes hold.
The second concern stems from the likelihood of cuts in defence spending, both here and in the US, as governments battle to contain yawning deficits and stave off the threat of credit ratings downgrades. That said, Cobham still offers exposure to some high growth areas such as intelligence, surveillance and cyber-security. Morgan Stanley says this should allow it to grow earnings at a compounded annual rate of 10 per cent over the three years to 2012. If achieved, that would put it well ahead of its peers.
It is also worth noting that the auguries are promising; investors need only look to the recent full-year results, which evidenced healthy rises in profits and revenues. So investors are faced with a dilemma, with the risk of some near-term pressure as traders switch out of defensives, coupled with the prospect of budget cuts, balanced against an evidently strong company with the potential for what could be strong growth.
It all comes down to valuation, which leaves little room for doubt. Cobham trades on a surprisingly thin multiple of 11.6 times Evolution's forecasts for 2010. That falls to 10.8 times on the numbers for 2011, suggesting that the market may be pricing in too much disappointment while at the same time overlooking the potential for growth. We said buy in November last year and, given the stock's attractive valuation, we say keep buying.
Our view: Buy on weakness
Share price: 730p (-15p)
Immunodiagnostic Systems might sound vaguely like some flaky biotechnology stock but it is actually a solid company that makes diagnostic testing kits for the clinical and research markets. And yesterday's trading update had much to like about it, not least the fact that it beat Panmure's forecast revenues (£37.1m against £35.1m). Said revenues are 49 per cent up on the previous year and ahead in all of the company's diverse markets. Profits will be solidly in line with expectations too.
So, then, why the fall in the share price? Well, the problem is getting approval from the US Food and Drug Administration (USFDA) for the automated immuno-analyser IDS-iSYS. The company notes that approval times are lengthening, but it is still worrying and arguably grounds for caution about the stock, which would move into sharp reverse if the delay turned into something more worrying. It is also true that the shares have had a good run in recent months.
Panmure has Immunodiagnostic Systems on 16.9 times 2011 full-year earnings, which looks pricey, but is much more reasonable when compared to the company's peer group. The issue with the USFDA remains a worry for investors but the company generally looks in good shape and, if the shares fall further over the coming days, investors willing to take a risk should be prepared to take advantage. Buy on weakness.
Our view: Hold for now
Share price: 4.75p (Unchanged)
Eckoh provides what it calls "hosted speech recognition services" – those robot voices on the end of a telephone booking line. The next time you are negotiating with a machine to buy Vue cinema tickets, you will be talking to Eckoh. The company has changed hugely since it was founded in 1993 and is backing its "Speech Solution" operation to provide its main growth.
It may be a small operation but the client list includes some big names including National Rail Enquiries, the bookmaker William Hill, Parcelforce Worldwide and mobile phone operator O2. It also provided the automated phone-in lines for Comic Relief.
At the interim results in December, Eckoh reported that turnover in speech had risen 15 per cent year on year. Yet, the revenues declined overall because of a slide in the larger side of the business, the so-called Client IVR, or premium-rate phone services. Revenues in that division fell 28 per cent after it lost ITV as a client in December 2008, and IVR calls have further reduced as publishing clients have gone out of business. The future doesn't look great for the division, and management admit the market has been on a downward slope for a couple of years. Eckoh's speech business looks good but IVR issues worry us. Still, the shares are cheap, so hold for now.
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