Investment Column: Oil volatility splinters Wood's confidence

Serco Group; Advanced Medical Solutions
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Our view: Cautious hold

Share price: 198.8p (-1.2p)

When oil prices are high, Wood Group, the oil and gas services and engineering company, benefits as producers try to suck up as much of the black stuff as possible – so it must be delighted by the news that Opec is set slash output by 2.2 million barrels per day.

Yesterday, the FTSE 100 group said that while its performance to date had been strong, the dire economy and rapid fall in oil costs in recent months has led to a "more uncertain and challenging outlook". In the current market, investors are taking anything less than supreme confidence about the future as a sign of weakness and Wood is no exception: its stock closed marginally down last night.

Oil futures have been so volatile over the year that it is nearly impossible for investors to predict how a punt on Wood will pan out, especially with company itself saying that "indications are that there will be a reduction in spending by clients, with a consequential impact on service company activity". Perhaps surprisingly, analysts were generally upbeat about the stock. Evolution said that while earnings per Wood share would fall by 20 per cent next year, the resulting 2009 price-earnings ratio of five times was line with the sector average and the share price would hit 325p.

Wood Group is well run and solid but investors hate volatility, even in the best of markets. The global slowdown and unpredictable nature of oil prices means that backing Wood today is an uncertain science. The stock has lost more than half its value in a year and while its chief executive, Allister Langlands, points out that its trading performance is in fact far stronger, that will be no consolation to shareholders who have lost out. Cautious hold.

Serco Group

Our view: Avoid

Share price: 430.75p (+6.75p)

At first glance there is no reason not to buy shares in Serco, the outsourcing and support services group. It issued a trading update yesterday saying it would achieve double-digit revenue growth for the foreseeable future. The market predictably seized upon the news as a beacon of hope and its shares closed 1.6 per cent up on the day.

Serco, which specialises in areas such as facilities management, speed cameras and the Docklands Light Railway in London, is benefiting from the Government's current predilection for cost-cutting. Yesterday, Serco said it had picked up £400m of new contracts in the second six months of this year. Investors that bought the stock a month ago have seen their investment grow by more than 11 per cent.

If only it were so simple. While Serco is a very strong group, and those wanting somewhere to hide away their money during the recession would do well from buying the shares, the good news is already priced in and the stock is expensive. Yes, a healthy group is hard to find but there are still punts that offer better value.

Analysts at Panmure Gordon, who value the group as trading at 17 times its 2009 price-earnings ratio, offering a dividend yield of 1.1 per cent, see the share price falling to 360p. "We believe continued pressure on governments to offer higher quality services and lower costs will lead to increased outsourcing, not only in the UK but also in the rest of the world," they said. "This should provide the group with ample opportunities to grow."

Serco is a good company but now is not the time to buy its stock. Avoid.

Advanced Medical Solutions

Our view: Buy

Share price: 33.25p (+0.75p)

The problems facing biotech companies have been well documented: nervous investors have ceased funding the industry, much of which comprises small, cash-burning groups that generate little, if any, revenue. But there are exceptions. Advanced Medical Solutions (AMS), which makes dressings for wounds and the technology to close wounds during surgery, is having a ball. While the share price of most similar Aim-listed companies has collapsed in recent months, AMS's stock is up by 37 per cent year-on-year.

The key, says its chief executive Don Evans, is to have "multiple products in multiple markets" – which helped the group to become profitable two years ago. Since then, it has never looked back. It told the City yesterday that its full-year profits would be at the top end of predictions.

Doom-mongers might argue that AMS's stellar performance is already priced into its shares, but experts at its house broker, Teathers, said: "We value AMS based on a comparative basis versus historical peer group earnings multiples. These currently trade in the range of 16 to18 times. Applying this multiple implies fair value for AMS of 41.6p to 46.8p." Buy.

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