Investment Column: Experian does just enough to merit holding

Smiths News; Cookson
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Our view: Hold

Share price: 649p (+15.5p)

Even with the credit crunch coming to an end and the world economy slowly recovering from the worst of the financial crisis, a company like Experian has a problem. Consumers have become more cautious about borrowing (no bad thing) while banks are still lending far less than they were – and this will remain the case for some years to come.

It means demand for the services of a company which checks people's credit histories is correspondingly less than it once was. What is Experian to do? Yesterday's trading update gave some idea – that's if you can see through the company's disgraceful mangling of the English language to describe what it does and how it is performing (the term "verticals" being a particularly horrible example).

Experian is more than just a credit checker, having transformed itself into a global information company whose business extends to more than 90 countries, offering services such as fraud prevention and risk management. Growth will undoubtedly come from its ability to open up new markets and offer new services.

And things appear to be going reasonably well. There is no earnings data, but Experian is expanding its revenues again – 9 per cent at actual exchange rates compared with an 8 per cent fall last year. This bodes well for when the information on earnings is forthcoming. The figures were better than some had expected, although the credit-checking operation remains weak. The trouble is, the shares have risen to reflect the expected upturn, more than doubling since their nadir at the end of 2008. They now appear to be trying to find a trading range.

On about 14 times full-year earnings, they are probably fairly valued at the moment, and the dividend yield is minimal. We mistrust any business that struggles to communicate in plain English, but Experian still shows just about enough potential to make the shares worth holding for now.

Smiths News

Our view: Hold

Share price: 112.5p (+1.5p)

Smiths News distributes newspapers and magazines across Britain on behalf of all the major national and many regional publishers, with a heritage stretching back 200 years. Its roots lie in the company set up by Henry Walton Smith, who started a news stand in 1792 which would later became WH Smith. The news distributor broke from the retailer to create Smiths News in 2006. Investors have had a rollercoaster ride ever since.

Yesterday, however, the group put out an interim management statement that shows operations are ticking along as expected, with sales rising by a healthy 37.7 per cent from 1 March to 10 July year on year. Smiths ascribed the rise to the acquisition of Bertrams, the supplier to independent booksellers it bought in 2009, as well as to a series of contract wins last year.

The group has suffered a 4.5 per cent decline in newspaper revenues, partly as a result of a price war between the tabloids, while magazine revenues were down 1.6 per cent, although that's an improvement on the first half and was driven by sales of World Cup editions. Smiths management says the group is making progress with the integration of assets bought from Dawson News in August and is also on track to save the £6m in costs promised across the enterprise. Altium has the stock on a price of 7.6 times estimated 2011 earnings. That is undemanding and, given the steadiness of the company, we would hold.


Our view: Buy

Share price: 431.3p (-1p)

Cookson's shares began the year at about the 422p mark and are barely above that now, despite some violent swings in the intervening months. Much of the recent pullback has probably been down to worries about the recovery, and though we share concerns about the way parts of the West are dawdling their way out of the slump, we are not as worried about world in general.

Yes, there has been some slowdown in the pace of Chinese growth, but at more than 10 per cent in the second quarter, it's still motoring like a Ferrari and carrying South-east Asia with it.

As Investec points out, Cookson is the key UK industrial proxy for global steel volumes, which could well be lower over the second half of the year. But these concerns appear to be over the price, so much so that despite steel production rising in recent months, Cookson has been trading down.

They trade on less than nine times forecast earnings for 2010. That figure falls below eight for 2011, and below seven for 2012. The market is being too harsh on the short term, overlooking the potential for strength in the future. Buy ahead of interims in August.