Investment Column: Legal & General is too cheap to ignore

Moneysupermarket.com; Marston’s


Our view: Buy

Share price: 62.15p (-3.1p)

Life insurance is a complicated business, says Legal & General's chief executive Tim Breedon, adding that that explains the relative cheapness of his company's stock. The shares got even less expensive yesterday, when they fell 4.75 per cent after the group's first-half results.

Complicated accounting procedures and the lack of understanding among some analysts contributed to the fall in the share price , Mr Breedon argues, saying that punters who buy the shares today would be getting a modern, well-capitalised and efficient life insurance group that has the cash generation to provide for good dividend payments in the future.

No doubt, and we applaud Legal & General for its attention to cash generation and the balance sheet repair work it had done. However, investors will be unhappy that the dividend was slashed by 45 per cent yesterday, even if Mr Breedon argues that the payment bettered the expectations of most analysts. Profits were down, and even though this was again expected, it is not something that should fill buyers with confidence.

And yet we do rather like Legal & General. Analysts at Panmure Gordon do too, and point out that the group trades at a 31 per cent discount to enterprise value: "On an IFRS price-to-net-asset-value basis, the shares are trading at a multiple of only 1.16 times. The dividend yield based on our 2009 forecast of 3.2p a share is a healthy 4.9 per cent. We think that if the share price does not recover in the short term (based on flat investment markets), then L&G will increasingly become the subject of corporate activity".

The industry still faces challenges, not least that of helping to educate investors, and the next few months are likely to remain tough, but the stock is cheap enough to make a speculative bet worthwhile. Buy.

Moneysupermarket.com

Our view: Buy

Share price: 72p (-0.3p)

When better to shop around for the best possible deals than when money is tight during a recession? Unfortunately for the price comparison business Moneysupermarket.com, that logic has not played itself out. It reported a first-half profit of £1.9m yesterday, down from £14.4m last year, on sales that were down 30 per cent.

The problem for Moneysupermarket.com is that its key businesses have been credit crunched. With mortgage finance having dried up and personal loans harder to come by, fewer people have been hunting down bargains. That's had a knock-on effect on insurance-related searches too. Other revenue streams have also suffered.

In the bad old days of dot.com mania, that combination would have spelled disaster. Yet Moneysupermarket.com is still here, still in the black in fact, and was yesterday able to offer a special dividend of 4.93p a share.

This is a well-run company with no borrowings. Its cash pile of £76m reflects a prudent approach coming into the recession, and the willingness of founder Simon Nixon to step aside from day-to-day control was a mature move that has paid off – new boss Peter Plumb has brought a fresh approach.

Indeed, Moneysupermarket.com is now cautiously optimistic about the second half of the year, with trading having begun to pick up during the third quarter. A marketing campaign starring Dragon's Den entrepreneur Peter Jones is performing well.

There are no obvious comparisons, but Moneysupermarket.com does look highly valued at around 18 times 2009 earnings according to estimates by Investec. Still, threats of competition from internet giants have not yet become a reality. This is a growth stock to put away for the long term. Buy.

Marston's

Our view: Buy

Share price: 95.8p (+0.6p)

When we last looked at pub group Marston's a few months ago, the company said that, at last, it was emerging from the nuclear winter that has engulfed the industry over the past couple of years.

We were cautious and wanted more evidence that the numbers were not just a blip, especially after its chief executive Ralph Findlay, warned the market not to get carried away too.

We think that now is the time to buy. The group put out another set of steady-as-she-goes numbers yesterday, saying that like-for-like sales in the six months to the start of August were up 2.3 per cent, with a 6 per cent rise in food sales. Mr Findlay is more optimistic, saying that since February trading has been stronger, despite rising unemployment and, almost unbelievably, a wetter July than last year.

Buyers should still exercise caution, but with the stock falling by 25 per cent in the last quarter, and offering a dividend yield of 6 per cent, we think punters are getting a bargain. Buy.

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