Investment Column: Go-Ahead hopes to gain from price rises

Corporate bonds; Cadbury
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The Independent Online

Our view: Cautious hold

Share price: 1050p (+40p)

With fewer people going to work in London, you would be forgiven for assuming that a company like Go-Ahead, which runs London's buses and owns two commuter rail franchises would be having it tough.

Keith Ludeman, the chief executive, says that while the economy is heading into a force five gale, Go-Ahead, which issued a trading update yesterday, has yet to feel any material impact of the downturn. He argues that as people turn away from their cars, groups like his benefit, especially with inflation-busting fare increases to come in January. The company is also trading at 5.8 times its price-earnings ratio – a discount to the sector average of 6.2.

It is not all that good, however. The group's Southern rail franchise is up for renewal in September and with three other bidders circling, there is a chance that the company will lose £600m of its annual £2.2bn revenue. One of the reasons for the group's more attractive valuation is that the market considers it to be more exposed to the downturn than its peers. Stagecoach's announcement that its rail business is starting to feel the heat hardly helped and contributed to the stock's 47 per cent fall over the past three months.

With investors being urged to back defensive stocks it would be imprudent to advise them to back a group that could lose a significant chunk of its business next year. Cautious hold.

Corporate bonds

Even the most casual observer of the equity markets will be aware that shares are an increasingly dangerous asset class. Even Marks and Spencer has lost nearly 60 per cent of its value in the past 12 months and Vodafone is down 30 per cent. While there are bargains to be had and some groups offering genuine value, equities are looking like the sick man of investing when compared with corporate bonds. Yields on investment grade notes, those rated triple-B or higher and generally considered to be the safest, have shot up in recent months.

As bond yields increase, so prices fall and corporate debt is cheaper now than at any time since the 1930s, couple this to the fact that while defaults will certainly occur, the very worst default rate over the past 40 years is only 2.8 per cent, meaning that if investors buy a basket of bonds the chances of getting their fingers burnt are minimal. Those prepared to take a punt on riskier junk-rated debt, will benefit from even higher yields, and lower prices.

Ian Robinson, co-head of credit at F&C investments, points out that companies are inadvertently working for their bondholders: "The focus is reducing debt and getting companies on a surer footing and that is beneficial for bondholders. While we have not yet seen investors coming over to the bond market en masse, it is still early days."

Equity investors who have seen their holdings shrivel in recent months would no doubt be interested to learn that the yield on a 10-year Vodafone bond is about 7 per cent, and Marks & Spencer debt is earning 9 per cent.


Our view: Hold

Share price: 548.5p (-8.5p)

According to Cadbury, 40 per cent of its confectionery is bought on impulse. While that might not be the best strategy for investors, the group has plenty of sweeteners for investors. While the shares were marginally down yesterday on news of the group's trading update, the stock is one of the few on FTSE 100 that is in positive territory over the last month. Yesterday's trading statement, as expected, said that the company is performing in line with its expectations.

Not that Cadbury is simply going through the motions. It is in the first 12 months of a four-year restructuring and has spent the better part of 2008 selling off its drinks businesses and closing 15 per cent of its factories in an effort to improve the margin; all things that should keep investors onside.

The bad news for punters is that market already looks to have priced all this in. Analysts at Investec argue that the stock will fall over the next 12 months and that yesterday's statement felt, "a little underwhelming relative to some of the more bullish prognostications in the market".

Those at Killick Capital are equally unimpressed: "We believe the rating [of] 15.7 times 2009 consensus earnings is too high and would advise investors to seek out companies with similarly defensive qualities on more reasonable valuations."

Investors should be seeking safe stocks now, but that is not to say that there are not stocks available that offer the chance of decent returns. Those with a strong aversion to risk would be tempted, but others should accept that the boat has been missed as far as Cadbury is concerned. Hold.