Pearson
Our view: Buy
Share price: 1029p (+56p)
Pearson once owned vineyards, banks and an oil business. The public is most likely to recognise it today for brands including the Financial Times and Penguin Books. Yet its management is shaping the group into "the world's leading learning company", an area that is proving extremely lucrative, and in which 2010 is shaping up nicely.
This was evidenced by the first-half results that Pearson released yesterday, which beat analysts' expectations. Profits hit £203m, up from £111m in the first half of last year, driven by its North American education arm, where revenue was up 10 per cent.
Pearson has been reshaping the portfolio and sold its majority stake in the financial data group IDC. It has already invested half of the proceeds in bulking up the educational operation, with the acquisition of the vocational training group Melorio and a Brazilian education company, SEB.
But it is not just about education. Other divisions also looked strong yesterday. Penguin's operating profits doubled from £21m to £44m following a solid line-up of releases, as did the FT Group, which saw profits rise from £14m to £30m as it boosted digital subscriptions and corporate licences.
Dame Marjorie Scardino, Pearson's chief executive, said that across all divisions "this is as good a start to our year as I've seen". The results prompted the company to raise the profits outlook for the year, lifting earnings estimates 7 per cent to 70p per share.
The good news for shareholders is that Pearson tends to generate the majority of its profits in the second half, even though yesterday it was striking a cautionary note, given the uncertainty in the market.
While Pearson will face tougher comparatives, the management believe they are in a good position to grow in the medium term, given the growth prospects in core markets. Pearson, on a forecast multiple of 14 times full-year earnings, trades in line with its peers. It deserves to be on a premium, so buy.
National Grid
Our view: Buy
Share price: 509p (+6.5p)
National Grid prides itself on its cautious approach and reliability. Yesterday's trading statement confirmed this image, with a positive outlook and results in line with expectations.
There were forecasts of a "substantial improvement" from the company's gas distribution business, which contributes more than a fifth of operating profits, after a poor showing last year.
National Grid's £22bn of net debt is also set to come down, thanks to the £3.2bn rights issue in May. And the company remains on track with a £3.9bn capital investment programme and to support its dividend payments. Steve Holliday, the chief executive, says the group is well positioned to deliver another year of good performance to underpin the targeted 8 per cent dividend growth policy to 2012, so investors should be happy.
But there was also news about the company's US operations. Although National Grid confirmed plans to withdraw from its New Hampshire distribution businesses because of regulatory issues, reviews affecting its Massachusetts Gas and Niagara Mohawk Electric businesses are expected to conclude positively.
In the UK, meanwhile, the industry regulator Ofgem's review is likely to extend regulatory periods and establish an incentives-based system that could see National Grid earning higher returns. Taken together, National Grid looks attractive. On just 8.6 times next year's estimated earnings, it's cheap, too, so buy.
Pace
Our view: Buy
Share price: 214p (+26.5p)
Many families with Pace products in their living rooms have never heard of the British company. This year, it became the world's largest maker of digital set-top boxes for televisions, overtaking US-based Motorola and Technicolor of France. David Cameron made his first speech as Prime Minister launching a new economic strategy from Pace's headquarters in Saltaire, West Yorkshire.
The pay-TV market flourished in the downturn and Pace has been increasing its share. The first six months of the year showed good growth. Revenues rose by a fifth to £635.2m from £526.5m in the same period of 2009, while pre-tax profits rose 46 per cent to £45.5m, driven by the growth of high-definition TV and new clients. Pace increased its dividend by 45 per cent to 0.725p per share. It also has a strong balance sheet, up £20m from the beginning of the year at £94.1m.
Separately, Pace said yesterday it had acquired the wireless router company Wire, which will take it into the telecoms market. Trading on an undemanding 9.5 times estimated 2010 earnings, it's an obvious buy.
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