Investment Column: Investors safe with Reed Elsevier shares

Shire; Ladbrokes
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The Independent Online

Our view: Buy

Share price: 542p (+21.5p)

Just as most publishing groups are struggling to come to terms with the loss of revenue from advertisers battling recession, the Anglo-Dutch group Reed Elsevier comes out with a cracking set of full-year numbers.

There are some sectors, such as food or pharmaceuticals, that are defensive and, while it is an anomaly, investors can add Reed to their list of companies that will perform well so long as we do not hit economic Armageddon. About 80 per cent of the company's publications comprise legal and scientific offerings and, while the legal arm will struggle a little, growth will still be positive, says its outgoing chief executive Sir Crispin Davis. The company is being more conservative by trying to save costs, for example, by moving more of its operation online and cutting jobs, mostly in the US.

Sir Crispin cautions that Reed is not immune from the recession, but yesterday's full-year numbers showed that revenues, earnings, profits and the dividend were all up. Debt, at 3.1 times earnings before interest, tax, depreciation and amortisation (Ebitda), was slightly higher than hoped, but with the group generating £1bn a year in free cashflow, Sir Crispin says the group will be able to cut borrowings. Watchers at Goldman Sachs lauded the numbers, saying pre-tax profits and earnings per share were both 7 per cent ahead of expectations.

The other good news for punters is that the shares remain good value. "At 10.6 times 2009 [price-earnings ratio]... based on our current forecasts, we believe the stock is good fundamental value, the reassuring results should have a positive impact and we remain [buyers]." We agree and struggle to find a reason not to buy the stock. Buy.


Our view: Buy

Share price: 942.5p (-66.5p)

There are few reasons not to buy shares in Shire, the UK's third biggest drugs group. Yesterday's full-year numbers, with revenues up 24 per cent and earnings topping 36 per cent, frankly, cannot be argued with. And it will not go unnoticed that sterling shareholders will see the dividend up by 55 per cent as a result of an increase, and sterling is weakening against the dollar.

The numbers were impressive, with revenues up by more than $500m to $3bn; existing shareholders have done well in the past year, seeing the stock rise nearly 10 per cent. The only shock, perhaps, was the fact that the group felt confident enough to predict that it would achieve double-digit average growth between now and 2015, which has to be counted as a bold prediction.

Big pharmaceutical groups tend to outperform others in a downturn, but even then there are choices. Indeed, according to watchers at Citigroup, Shire shares trade at a premium to peers. "Shire trades on a 2009 p/e of 15.2 times, versus the EU speciality pharma peer group on 14.7 times and global speciality pharma group of 16.7 times," Citi said.

The chief executive, Angus Russell, also concedes that with one of its best selling treatments, Adderall, facing generic competition this year, 2009 will be more of a transition year. We do not care. Shire has 16 new products to hit the market in the next few years, which will bring in $3bn of revenue, Mr Russell says. Couple this with the performance of the shares, and the dividend, and we conclude that investors would be mad not to buy, even if there is better value in other drug groups. Buy.


Our view: Hold

Share price: 184.5p (+2.75p)

"Why take the risk?" ask analysts at Evolution. Full-year pre-tax profits at the betting group Ladbrokes were down to £250m in 2008, from £345m the previous year, while earnings per share fell from 47.6p to 36.4p.

And yet, the group's numbers yesterday, including a consensus-beating operating profit figure of £244m, up 0.8 per cent, sent the stock up 1.5 per cent, which adds to the share price's impressive rise of 22 per cent over the last three months.

Yesterday's trading update was mixed: the economic malaise clearly does not help, with the group expecting 2009 to be "challenging". However, Ladbrokes also said that the gross win, that is total bets minus payouts, was up 11.1 per cent. The group argues further that, in fact, the gaming sector is resilient in the face of a downturn and says its business is still doing well.

The watchers at Evolution are not keen, saying that they "believe the risk/reward ratio is better at William Hill and continue to rate Ladbrokes a sell, with a target price of 150p based on a 2009 price-earnings multiple of 8.9 times".

We do appreciate this argument, but we are also impressed with Ladbrokes' performance, especially with the company reporting strong trading in the first six weeks of this year, which have been blighted by bad weather.

Other experts are kinder, with those at UBS maintaining its buy rating, saying that the group is resilient and that they expect no downgrades to 2009 consensus figures. We are generally impressed but the wider economy is a worry. Hold.