Investment Column: GKN still has a higher gear to shift into

Fresnillo; Lavendon

Our view: buy

Share price: 201.5p (-8.4p)

Now is the time for the faint-hearted to take profits. When we first turned positive on GKN, a year ago, the automotive and defence parts supplier was trading at a measly 109p. When we reiterated our view in October, they were 172p. Now, we are pleased to report, they are a glorious 203p.

But there is an even better case for buying more. Yesterday's stonking full-year results speak for themselves. The group managed a glorious £345m in pre-tax profits, compared with 2009's crunching £54m loss, on revenues up by 20 per cent to £5.1bn, while margins shot up from 3.5 per cent to 7.6 per cent and the group's debt almost halved.

The company was understandably bullish about the progress made in 2010, pointing to improving market conditions on all three of its Driveline, Powder Metallurgy and Land Systems businesses, and the long-awaited recovery in the civil-aviation sector. Happily for investors, it is also upbeat about the year ahead.

To be sure, there are potential clouds on the horizon: rumbling economic uncertainty as government austerity measures bite across the debt-laden developed world, and cuts to defence budgets in the US and the UK, not to mention the risk to the recovery if the problems in the Middle East continue to send oil prices spiralling.

But GKN has a strong balance sheet, a good emerging-markets presence that should help to take up the slack elsewhere, and the benefit of aerospace growth taking off just as the resurgence in the auto industry begins to settle down.

Moreover, the shares remain affordable, trading as they do on a forward-earnings ratio of 10.1 times, according to Evolution. With plenty of ground still to make up from recessionary falls, we think there is still much headroom for future gains. Don't give in to temptation. Buy.


Our view: buy

Share price: 1,596p (+2p)

Silver is an important factor when thinking about investing in Fresnillo. That may not seem like the most profound observation – after all, Fresnillo is a major silver producer – but it is key as the share price is geared to the commodity markets. Ups and downs in the silver and gold price tend to feed through to movements in the stock.

The link has proved a boon over the past couple of months as investors sought to hedge against the risk of inflation and sluggish growth by piling into the shiny stuff.

Higher prices – silver has been bouncing around a 30-year record – also underpinned what were strong results from Fresnillo last night. The update gives solid grounding to the stock, which is up around 50 per cent since the beginning of September.

But should you wade in now? A couple of weeks ago, it looked like the commodity markets were cooling, with prices easing as traders banked profits. That had a negative impact on the Fresnillo share price.

Since then, however, prices have climbed back against the backdrop of growing turmoil in the Middle East. Recent data on inflation has also been less than cheery. Coupled with the strength evidenced by the results, we think the shares may well scale fresh heights in the months ahead. Buy.


Our view: hold

Share price: 99p (-4.5p)

Ever thought about who changes the bulbs when streetlights go out? No? Well, that is just one of the many services that Lavendon supports with its cherry picker-style "aerial work platforms".

Last year proved tough for the business as revenues were marginally down to £225.4m and pre-tax profits fell from £13.9m to £13.1m. As with so many companies, the cold weather in December did not help.

But that was then. Looking ahead, Lavendon's chief executive, Kevin Appleton, said that after reviewing the business there were opportunities to improve efficiency, adding that trading had been in line with expectations since the turn of the year.

Also encouraging is the fact that the group has cut debt by 23 per cent to £140.3m and that it returned to revenue growth across Europe in the second half of last year. All this, and the fact that the shares trade on respectable, but hardly bloated, multiples of 11 times forward earnings, argues against a sell stance.

But, equally, we are not convinced that Lavendon will fly just yet. Hold.

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