Investment Column: Costain will prove a predictable winner

John Menzies; Cohort


Our view: Buy

Share price: 25.75p (+1.25p)

Every time the construction and civil engineering group Costain makes an announcement on trading, the story is the same. Profits are always up, revenues are always up, the order book is always up, and just for good measure, there is usually a new client or two signed in on another long-term contract. Yesterday's pre-close trading statement was a bit dull in that nothing has changed. Predictably, the shares nudged ahead slightly.

Costain's trading performance is testament to the group's strong execution of its plan to target blue-chip clients in regulated industries. In the last year, Severn Trent has been signed up on a 10-year contract, while the group has won a deal with Manchester council for one of Europe's biggest waste disposal projects. For those that have not yet cottoned on, we rather like Costain, and think the shares are certainly worth holding. Naturally, however, there is a small snag.

The shares are pricey and each time Costain puts out one of its impressive updates, the share price increases by a little less than last time. The truth is that everyone expects Costain to keep churning out the good results and the stock has become stymied.

Chief executive Andrew Wyllie argues that with growth expected, both from acquisitions and organically, the share price will improve, but the market is not yet buying that message.

Ultimately, we would be buyers, however. In recent months, there has been something of a move to cyclical stocks as fears of economic Armageddon have receded. We would still argue that the economy is sickly and that investors should still be chasing stocks like Costain. Buy.

John Menzies

Our view: Buy

Share price: 157.5p (+23.5p)

If you had to name two industries hit particularly hard by this recession, no one would argue if you picked newspapers and aviation. Newspapers are struggling from online competition and a drop in advertising spending, while cargo carriers are having a woeful time as companies export fewer of their goods.

Not a happy picture for John Menzies, the newspaper distributor and air cargo handler. Add in what the market perceives as too much debt, and you surely have a dog.

It might come as a surprise, then, that we would be buyers. The group's update yesterday sent the stock up 17.5 per cent after it said trading is in line with expectations and full-year profits will hit targets. Finance director Paul Dollman says that cargo volumes are drastically down on previous years, but that they have hit the floor. The group has cut its debt and removed plenty of cost, and while newspapers sales continue to struggle, Menzies benefits from the inevitable hike in cover prices. The company will also benefit from recent acquisitions and will take its market share in the newspaper distribution sector up to about 45 per cent.

Add into that the fact that the shares are cheap – "we increase our price target to 200p, just over 4.5 times enterprise value to Ebitda, reflecting the encouraging news on debt reduction and the better than expected trading performance," say the watchers at Brewin Dolphin – and we think there is a good opportunity to buy an undervalued stock. We would never claim that Menzies is a conviction buy, or even that it has too many defensive qualities. Frankly, it does not, but we do think the share price will continue to rise. Buy.

Cohort

Our view: Buy

Share price: 175p (+3p)

In bygone times, a cohort was a tenth of a Roman legion, although it is unlikely that Caesar's army had any of Cohort's technology at its disposal. The group provides electronic technology and advisory services, largely to the defence sector, and unlike many Alternative Investment Market-listed companies of a similar size, Cohort's full-year results detail higher profits and a hike in the dividend.

Investors with a passing interest in politics will be aware that the present debate between the parties concerns which will cut public spending most. Given the country's debt, it is a given that both parties will have to rein back in certain areas, and with British forces having now left Iraq, defence is certainly an area that will see compressed budgets. Cohort is aware of this and has taken on overseas clients, including the Thai airforce and a mystery Middle Eastern client that chief executive Andrew Thomis would rather not name.

Cohort is a very resilient business, and for those not squeamish about investing in defence companies, the group is a good punt. That the stock trades at "undemanding" levels, according to the analysts at Numis strengthens the investment case. Buy.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Arts and Entertainment
Ellie Levenson’s The Election book demystifies politics for children
bookNew children's book primes the next generation for politics
Sport
Adnan Januzaj and Gareth Bale
footballManchester United set to loan out Januzaj to make room for Bale - if a move for the Welshman firms up
Arts and Entertainment
Lena Headey as Cersei Lannister in Game of Thrones
film
News
i100
Sport
Yaya Sanogo, Mats Hummels, Troy Deeney and Adnan Januzaj
footballMost Premier League sides are after a striker, but here's a full run down of the ins and outs that could happen over the next month
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

Selby Jennings: Quantitative Research | Equity | New York

Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

Selby Jennings: SVP Model Validation

Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

Day In a Page

War with Isis: The West needs more than a White Knight

The West needs more than a White Knight

Despite billions spent on weapons, the US has not been able to counter Isis's gruesome tactics, says Patrick Cockburn
Return to Helmand: Private Davey Graham recalls the day he was shot by the Taliban

'The day I was shot by the Taliban'

Private Davey Graham was shot five times during an ambush in 2007 - it was the first, controversial photograph to show the dangers our soldiers faced in Helmand province
Revealed: the best and worst airlines for delays

Revealed: the best and worst airlines for delays

Many flyers are failing to claim compensation to which they are entitled, a new survey has found
The stories that defined 2014: From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions

The stories that defined 2014

From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions
Stoke-on-Trent becomes first British city to be classified as 'disaster resilient' by the United Nations

Disaster looming? Now you know where to head...

Which British city has become the first to be awarded special 'resilience' status by the UN?
Finally, a diet that works: Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced

Finally, a diet that works

Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced
Say it with... lyrics: The power of song was never greater, according to our internet searches

Say it with... lyrics

The power of song was never greater, according to our internet searches
Professor Danielle George: On a mission to bring back the art of 'thinkering'

The joys of 'thinkering'

Professor Danielle George on why we have to nurture tomorrow's scientists today
Monique Roffey: The author on father figures, the nation's narcissism and New Year reflections

Monique Roffey interview

The author on father figures, the nation's narcissism and New Year reflections
Introducing my anti-heroes of 2014

Introducing my anti-heroes of 2014

Their outrageousness and originality makes the world a bit more interesting, says Ellen E Jones
DJ Taylor: Good taste? It's all a matter of timing...

Good taste? It's all a matter of timing...

It has been hard to form generally accepted cultural standards since the middle of the 19th century – and the disintegration is only going to accelerate, says DJ Taylor
Olivia Jacobs & Ben Caplan: 'Ben thought the play was called 'Christian Love'. It was 'Christie in Love' - about a necrophiliac serial killer'

How we met

Olivia Jacobs and Ben Caplan
Bill Granger recipes: Our chef's breakfasts will revitalise you in time for the New Year

Bill Granger's healthy breakfasts

Our chef's healthy recipes are perfect if you've overindulged during the festive season
Transfer guide: From Arsenal to West Ham - what does your club need in the January transfer window?

Who does your club need in the transfer window?

Most Premier League sides are after a striker, but here's a full run down of the ins and outs that could happen over the next month
The Last Word: From aliens at FA to yak’s milk in the Tour, here’s to 2015

Michael Calvin's Last Word

From aliens at FA to yak’s milk in the Tour, here’s to 2015