Investment Column: Take Stagecoach home, it's good value

RPS Group; Communisis
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Our view: Buy

Share price: 192p (-13.3p)

The theory is simple enough: during an economic downturn, people needing to travel will pick the most inexpensive option. Rather than taking the costly car, punters will travel with the masses on public transport.

The public relations people at Stagecoach, the bus and train operator, say this is driving what can only be described as a solid trading performance; an update was issued yesterday. The group says each of its arms, which include bus and train companies in the UK, as well as an inter-city bus service in the US, is doing rather nicely and if the group is right in believing it will avoid much of the pain of recession, buyers should decide to park their money in the company.

However, one of the big problems facing all investors is that anything representing a safe option is invariably fully valued. The same is true of Stagecoach. Some analysts say many buyers have already recognised this and it is now too late for good returns. Those at Investec say: "Our 250p price target is based on 10 times price earnings for calendar 2009, but we retain our hold rating given that, on 8.2 times price earnings on our forecasts, the shares trade at a slight premium to the 7.6 times average of the peer group."

In fairness to Stagecoach, there are others that advise clients to buy, such as watchers at Dresdner Kleinwort, who say the shares will reach 277p. Most investors will realise that parking their money in a safe place must take precedence over trying to make huge returns. Stagecoach offers this opportunity and punters should buy the stock in the short term. Buy.

RPS Group

Our view: Hold for now

Share price: 141p (+1.5p)

As BP's results on Tuesday testified, energy companies are in the habit of making lots of money. Good news for BP, but also good news for companies like RPS, which advises energy firms on securing planning permission for their projects.

The group issued a market update yesterday saying it, "remains well positioned to deliver results for the full year in line with expectations". All fine then, and in these markets a sure-fire winner for investors, especially as watchers at Royal Bank of Scotland argue that the shares are attractively rated, "[our] forecasts remain unchanged (full-year 2008 profit before tax of £57.6m). The shares are trading on a 2008 price earnings ratio of just 8.1 times, dropping to seven times in 2009 (enterprise value to Ebitda of 4.2 times), which looks cheap". The problem for buyers is that the company has been saying that for some time now, but the market does not appear to be taking too much notice. True, nearly every stock on the FTSE 250 has been hammered, but RPS's share price has fallen by 46 per cent in the last month, and yesterday's upbeat statement could only muster a 1.1 per cent rise in the stock.

The truth is that RPS looks to be a well-managed group that has enough strings to its bow to survive the coming recession without too many problems. As such, investors should, in normal circumstances, buy the stock at its depressed levels. We would wait, however, to see just how deep the recession is before committing to a group that seems to garner little support among investors. Hold for now.


Our view: Buy

Share price: 40.5p (-1.5p)

As the crunch hits consumers, so they are more likely to want to keep tabs on their financial position. This is good news for Communisis, which has contracts with most of the major banks to print things like statements for their customers.

The company is known as a printing group, but according to chief executive Steve Vaughan, it offers more than that: while some of its competitors that do "plain vanilla" printing will struggle, Communisis is "massively better placed", he says.

The claim comes from the fact that firstly, Communisis operates in several markets, from direct marketing to its banking business, and two, according to Mr Vaughan, the company has got its costs under control.

Watchers at Panmure Gordon are fans saying, "we leave our forecasts unchanged on the back of this update, though potentially we believe our numbers for 2008 could be too light. Our target price of 85p is based on a recovery multiple of 12 times 2009 earnings-per-share, which we remain happy with, (almost) regardless of current economic pressure."

No group is recession-proof, but we rather back Communisis's chances of getting through a downturn without too many major scares. Buy.