Investment Column: GSK promises investors a shot in the arm

Compass Group; BG Group


Our view: Buy

Share price: 1,277p (+9p)

If it's not one thing, it's another. GlaxoSmithKline's chief executive, Andrew Witty, said that there is no evidence of the recession having an effect on business. As big pharma avoids the worst of the downturn, however, the industry does face pressure from falling drugs prices and increased competition from generic competitors.

Not that there was too much of that in evidence yesterday when the UK's biggest drugs maker published its 2008 results, saying that pre-tax profits were down to £6.7bn, from £7.4bn in 2007. Mr Witty reckons the group has seen off the worst of the generic competition, and as the company presses ahead with its greater push into consumer healthcare, vaccines and the emerging markets, the future is bright.

Investors will be pleased that the group is planning to make £1.7bn of savings by 2011, even if an undisclosed number of soon to be former employees will rightly fear for their jobs.

GSK is a buy, especially as Mr Witty is on the record saying that the group will not do any mega-merger deals that usually turn out to be nothing but expensive. Analysts at RBS argue that, with a tough year for generic competition in 2008 out of the way, "we now raise our target price to 1,350p, based on our three phase discounted cashflow valuation".

All that said, buyers should be concerned that the group is to stop publishing short-term earnings forecasts. Mr Witty says that they distract from the group's longer-term strategy. A reduction in information that the market does find useful, however, does not sit squarely with that argument.

Investors, however, should be encouraged to buy GSK. It is a defensive stock, and with the shares up 7.6 per cent in the last 12 months, the market likes the growth strategy. Then there's the dividend increase of 8 per cent announced yesterday, which should also help. Buy.

Compass Group

Our view: Buy

Share price: 357.25p (+14.25p)

Food companies, assuming there are no other skeletons in the cupboard, are renowned for being a decent investment punt during a recession. We all have to eat, after all.

Following the analogy, Compass Group, the biggest caterer in the world, which yesterday published its interim management statement, should be top of every investor's stock picks. Thankfully, it is not disappointing shareholders.

The FTSE 100 company's shares have been stellar for punters in the last year, bucking the trend and actually rising by a touch over 5 per cent. After announcing yesterday that it had had a "very good first quarter," with profits "well ahead of the same period last year," the shares were up another 4.2 per cent.

Nearly every listed company is trying to convince investors of its ability to cut costs, but with Compass, which provides catering services for a variety of sectors including the Army and Chelsea Football Club, the claim islikely to stick, given the number of casual employees on its books.

And it gets better still for investors: despite the impressive performance of the shares, they are still undervalued, say the experts. "This update confirms its defensive growth profile with good earnings to free cashflow visibility. Its 15 per cent valuation discount to [rival] Sodexo looks unwarranted despite its more cyclical profile... Sodexo trades at 10.1 times 2009 earnings before interest and tax versus 9.4 times for Compass," says Exane BNP Paribas.

In times such as these, safe stocks are the ones to go for, and that is certainly what you get with Compass. The fact that it also trades at a discount is a further bonus. Buy.

BG Group

Our view: Buy

Share price: 1,048p (+97p)

A good day for the oil and gas outfit BG Group yesterday as it beat forecasts to deliver a 25 per cent hike in fourth-quarter profits.

The analysts were falling over themselves to recommend the company. Particularly impressive was BG'sliquefied natural gas (LNG) performance, a division that contributed earnings before interest and tax of £456m, which was well above the estimates of the likes of Merrill Lynch, where analysts had predicted just £205m.

The group was bullish in its outlook for 2009, saying that global demand for LNG will hit 400m tonnes by 2020, and that the company is expecting growth this year despite the recession.

"The increased profit guidance for the LNG division could lead to some profit upgrades. At the moment, the consensus earnings per share estimate for 2009 is 75p, which places the shares on a prospective PE of 12.7 times," counsel Charles Stanley's watchers, who say buy. We agree.

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