Investment Column: Savills a short-term buy following upgrades

Wood Group; McBride
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The Independent Online

Our view: Short term Buy

Share price: 301.2p (+11.2p)

Here's one for the optimists. Savills, the upmarket property company, produced a reverse profits warning yesterday, saying its earnings would be appreciably ahead of expectations. Notwistanding 50 per cent top rates and supertaxes on bankers' bonuses, it seems the top end of the property market is holding up rather nicely, and commercial property in the UK is also doing better than expected. Savills has been further helped by its Asian businesses, which were expected to cool but haven't. The tigers are still roaring.

Could it be that the fabled green shoots that were supposed to appear in the third quarter but didn't are finally taking root? We'll see. Savills certainly appears to be doing better than expected in its favoured niches and an unexpected upgrade a year after a real (and nasty) profits warning is certainly worth cheering in the current climate.

All the same, its worth noting that the £22m to £24m full-year earnings being predicted by analysts, against £17m previously, is still a sharp drop on last year and way below the £70m-plus turned in during better times.

The valuation on Savills is hardly cheap, even with the revised expectations. Numis has it on 20 times this year's earnings, 21 times next year's, with a prospective yield of 3.1 per cent rising to 3.3 per cent. Those ratings can be justified only if this is more than just a one-off.

Still, on a short-term horizon, continued low interest rates and an improving outlook should keep Savills' businesses humming, even with City bonuses being paid in shares (and this year getting taxed). It is worth noting that Savills shares have been weak in recent weeks. There are grounds for thinking there is value to be had in the short term, even if the longer-term outlook for the company is harder to predict. Savills should therefore be considered a short-term trading buy, but be prepared to head for the exit if signs of economic weakness put its new found vim under threat.

Wood Group

Our view: Buy

Share price: 288.1p (-10.4p)

Yesterday's trading update from the energy services provider John Wood Group was good news, insofar as it confirmed that its 2009 earnings would meet market expectations of $354.5m (£220m). The company said its financial position was still strong and it would deliver "good operating cashflow for the year". It remained confident in the medium- and longer-term fundamentals of its key markets and said it was developing the business to ensure it was positioned to deliver "good growth as energy market activity recovers." In the shorter term, things are less upbeat. After a tricky year, not helped by delays in both upstream and downstream projects in the company's subsea and pipelines division that put pressure on margins, John Wood said earnings are still set to come in 20 per cent lower than last year's $441m, even if it does meet expectations.

But the company says it has good prospects for next year, and the all-important US rig count is already showing signs of recovery, which will help boost the company's pressure control division.

With a price-to-earnings ratio estimated by Evolution Securities at 9.4 times in 2009 and 11.5 times in 2010, the stock looks very tempting when compared with the rest of the sector. With the real progress not expected until the second half of next year, there is plenty of time to get in on the action and investors should be well rewarded for doing so. Buy.

McBride

Our view: Buy

Share price: 209.1p (-1p)

McBride has rallied with the wider retail sector this year. The company, which makes own-brand products for leading supermarkets such as Tesco and Asda, has seen its share price swell by more than 70 per cent since January.

Indeed, the stock currently trades at levels not seen since before the financial crisis. This seems worrying, because the economy is nowhere near as strong as it was before the credit crunch, and yet we like McBride.

Our positive view is based on three factors. First, the company is on the right track and expects its operating profit for the first half to exceed expectations. Secondly, the economy has been deeply bruised by the recession. A return to growth, widely expected in the fourth quarter, is only the first step towards a recovery.

Moreover, the state of Britain's public finances points to a period of austerity. This backdrop bodes well for McBride because its stable of high value but low cost own-brand products provides attractive alternatives for thrifty consumers. Finally, despite the strength in recent months, the stock trades on an acceptable normalised multiple of 12 times Investec's forecast earnings for 2010. Buy.

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