Investment Column: Keep your seats on Stagecoach as it moves to secure future growth

Rathbone Brothers; Aegis
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The Independent Online

Our view: Hold

Share price: 238.3p (-9.8p)

Stagecoach issued an encouraging update yesterday, showing that there are companies that can perform well despite the grim economic backdrop. There was robust growth in the UK and some very good figures in North America.

In the UK, the trend of office-goers choosing to hop on the train as fuel prices go up continues and is helping Stagecoach and its peers. Whatever your expectations ahead of the result, the figures – nearly 9 per cent like for like revenue in the company's UK rail divisions and nearly 10 in its Virgin Rail joint venture in the 24 weeks to mid-October – are not to be scoffed at.

Across the Atlantic, the company recorded double digit growth in North America. This should be little surprise given the attractiveness of its Megabus business, which offers a budget alternative to cash-strapped American consumers. No wonder Stagecoach has been busy expanding the reach of the division, which now links more than 70 locations across the US and Canada after spreading its tentacles to the southern US states of Alabama, North Carolina, Tennessee and Florida.

The move, which was announced last month, bodes well for future growth, as American consumers are unlikely to find themselves suddenly flush with cash. That is the business side of things and it looks good. On the share price front, Stagecoach has drifted lower since we last recommended buying in.

Back then, the stock was trading at around 247p and had a valuation of around 10 times estimated full year earnings. Today, it is lower, but not by much. And the rating is pretty much where it was back in April, with Panmure Gordon putting Stagecoach on 10 times forward earnings.

Given the demonstration of growth yesterday, and the recent expansion of Megabus, we think the share price will recover. However, since we are sitting on a small loss relative to our last recommendation, and since the wider stock market is unsettled owing to nervousness around the eurozone, we think its only prudent to lower our recommendation for now.

Rathbone Brothers

Our view: Avoid

Share price: 1,090p (-60p)

Rathbone Brothers is something of an oddity in the City. It is a traditional, rather stuffy, sort of fund manager which looks after people who have at least £500,000 or so to spare.

You hand over the cash and, within some agreed parameters, Rathbone's wealth managers will look after it for you on a "discretionary basis" (so they take the decisions). While that might seem rather old fashioned, it's an approach that has worked quite well.

Rathbone yesterday announced that it had pulled in £284m of net new funds in the third quarter despite all the turbulence in the markets. Cutting through its financial gobbledygook, the company says it is succeeding because customers like the fact that its people produce individually tailored investment plans for them. And they're happy to pay up for the service.

Well, perhaps they have reason too. Funds under management stood at £15.1bn at 30 September, down 3.2 per cent from £15.6bn at 31 December, 2010. That compares to a decrease of 13.1 per cent in the FTSE 100. Some of that is down to new money coming in, but the firm's fund managers seem to be doing rather well in the circumstances.

But while Rathbone might be stolid and conservative, its shares boast a decidedly racey rating, trading on a hefty multiple of 14.6 times full year earnings. There is a 4 per cent prospective yield, which is fair as far as fund managers are concerned, and helps mitigate the lofty valuation.

But it does not do enough to make the shares look worthwhile. There is no doubt: Rathbone has put in a solid performance. However it is difficult to see why the shares deserve such an exalted price.

Aegis

Our view: Buy

Share price: 135.4p (-1.8p)

The advertising company Aegis "blew out the lights" in the third quarter, according to one enthusiastic analyst, and its prospects for the full year are looking pretty rosy as it outstripped its rivals in terms of growth.

Liberum Capital was particularly impressed saying organic revenue growth "smashed expectations" as it rose 11.2 per cent and upgraded its forecasts. North America and the faster growing markets of China, Russia and Brazil were the drivers behind the growth. The media division has secured major new contract wins, and is well ahead of this time last year.

On the downside, Europe remained mixed as the French operation had a challenging quarter, and 51 per cent of its operation is in the region. It also faces rising staff costs and the impact of the wider economic weakness.

And yet the future looks bright after management upped its guidance of matching last year's growth of 5.8 per cent, although they would not say by how much. This and the strength beyond Europe means we would buy.

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