Investment Column: Glaxo remains a healthy bet for investors

Finsbury Food; Pace
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The Independent Online

Our view: Buy

Share price: 1,373p (+9.5p)

Amid all the doom and gloom across the stock market and beyond, GlaxoSmithKline gave investors a reason to smile yesterday.

Yes, turnover was down in the second quarter, but the pace of decline was slower than before. Not just that, but profits were sharply higher, and the second-quarter dividend was up by a healthy (sorry) 7 per cent.

The easing of the pace of declines, while encouraging in itself, is particularly positive in that it chimes with what management has been saying all along. So not only does the performance confirm confidence in the company, but it shows that the top team has its eye on the ball.

This is important because another key take-away from yesterday's update was the detail on how chief executive Andrew Witty and his managers intend to deliver future growth. Having delivered so far, management pointed to sustainable sales growth, an improvement in the company's tax rate in the years ahead and an improvement in operating margins, among other things.

All this, as the analysts at Jefferies pointed out, sets the stage for a positive response from the markets. But just how positive is often a question of valuation. In GSK's case, the shares have been doing well, and outperforming rival group AstraZeneca, since the company issued its first-quarter results earlier this year.

And yet they continue to trade well below City target prices. Jefferies, for example, is eyeing 1,450p, while Seymour Pierce has a target of 1,445p. That leaves ample scope for gains. As an aside, it is also worth remembering that, as a pharma stock, GSK boasts the kind of defensive characteristics that are often sought out by investors in times of economic or market stress.

There is, then, little to fault here, and we see no reason to change our prescription just yet.

Finsbury Food

Our view: Buy

Share price: 22.75p (+1.75p)

Finsbury Food's shares were in high demand yesterday, and no wonder. The maker of cakes, bread and gluten-free bakery products pleased investors with a robust trading update, signalling better-than-expected sales for the year ending July 2011.

Total group revenues rose by 12.8 per cent to £189.9m compared with the same period last year, successfully reversing a 6 per cent decline for the last full year.

It's not all sweet, however. Making cakes is a high-margin business. One needs only to attend a school fête to see that. But Finsbury has not been able to escape the sharp rises in input costs that are hitting so many British businesses. It would like to be able to increase prices to offset this. However, this won't be easy in the midst of a consumer squeeze. Hence the focus on driving efficiencies.

All the same, profits are expected to come in in line with forecasts while the group is taking action to reduce its rather high debt levels.

The icing on the cake for us is that we said "buy" at 17.5p in July 2010. But even after yesterday's rises, the shares still look ridiculously cheap, trading on just 2.8 times forecast earnings for the 2011 financial year. Panmure Gordon has a price target of 30p for the shares. That would equate to 4 times forward earnings. Tuck in.


Our view: Avoid

Share price: 113.7p (+8.7p)

There's not been much to like about Pace, the set-top-box maker whose shares collapsed by 40 per cent after a brutal profit warning in May. The company was shaken by supply-chain difficulties as a result of the Japanese tsunami, and a poor performance in Europe. Since then, Pace has talked of "lessons" needing to be learnt, installed Allan Leighton as chairman, and announced a strategic review.

Yesterday it was in reassurance mode, announcing a first-half pre-tax profit of $68.4m (£42m), on revenues of $1.2bn. What's more, Pace reassured that a revised full-year profit forecast of earnings in the range of $150m to $170m should be met.

In other words, the company is on the recovery path. If Pace can deliver on its pledge to learn lessons from its recent travails, the shares would appear to be cheap, trading at just 5 times forecast 2011 earnings.

However, it should be noted that they've risen strongly from their low point, so some of the value in picking up the company as a recovery play has evaporated. We also feel that management need to prove themselves before we'd take the plunge.