Investment Column: Taylor Wimpey worth holding at this price

Fresnillo; Rotork
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The Independent Online

Our view: Hold

Share price: 31.1p (+2.58p)

Taylor Wimpey provided a much-needed ray of hope for investors in the house-building sector yesterday with a well-received set of results as the company returned to profit (£19.6m at the pre-tax level).

We've been bearish on the housing market in general, and house-building stocks in particular, for a few months now. Our caution was based on the view that, while the economy may be improving, the road back from recession to a sustainable recovery remains fraught with risks. The Government's austerity drive, for example, poses a serious threat to confidence, both among consumers in general and home buyers in particular.

The counter-argument, however, is that even if the second half of the year proves rocky, the housing market boasts some attractive long-term fundamentals: there still remains a marked shortage of housing stock in Britain. If the near-term headwinds hitting the market are easing, Taylor Wimpey remains a good place to invest. The shares are off by 40 per cent since late August 2009, and by more than 20 per cent since the beginning of May. However, at the current level of around 30p, that leaves the stock at a significant discount to JP Morgan Cazenove's 58.7p estimate of the current Net Asset Value per share. Debt levels remain a worry as does the fact that the hoped-for sale of the company's North American assets has yet to materialise. So we wouldn't want to buy in to the shares again just yet. But we don't seem them falling any further from here so hold.

Fresnillo

Our view: Hold

Share price: 1070p (+12p)

Fresnillo, the Mexican gold and silver miner, presents investors with something of a dilemma. On the one hand, the company is flying. The group issued its first-half numbers yesterday, showing that profits beat expectations .Earnings before interest, tax, depreciation and amortisation surged by fully 93 per cent to $392m (£245.7 m). Revenues jumped by 60 per cent.

That's icing on the cake for shareholders who have seen the stock jump by nearly 70 per cent in the past 12 months, reaching a record high of 1,139p a share last month.

The fact that the group affirmed that it is on track to hit full-year production targets – 38 million ounces of silver and 340,000 ounces of gold – is also a big plus. What's more, Fresnillo is clearly little more than a proxy for the gold and silver price, given the increases in the prices of the commodities in recent months: chief executive Jaime Lomelin said yesterday that he expects prices for gold and silver to hold in the second half with silver at around $17.50-$18.50 an ounce.

But there are still factors to make investors nervous. The cracking numbers led to only a slight uplift in the share price, suggesting to us that the market has already sussed out the right level for the stock. And despite net cash of $390m (£245m), the interim dividend of 9.2 cents is disappointing. We were also a little deflated by Mr Lomelin's comments yesterday that there are no plans to sell the group.

Fresnillo is one of those oft-mentioned takeover targets, which we suspect is also responsible for at least some of the momentum behind the shares. Without that bait, the stock may languish a little. It's perhaps harsh, but we might give the group a miss if you're not onboard. Hold.

Rotork

Our view: Take profits

Share price: 1512p (-23p)

Half-year results from Rotork – which makes valve controllers used in the exploration and water industries – yesterday looked like good news. Despite a "challenging trading environment", the company saw record revenue and profits in the first half – the former up 2.2 per cent to £184m, the latter by 9 per cent to £48m. Order intake was up by 8.5 per cent overall, with gains accelerating to a whopping 19.3 per cent year-on-year increase in the second quarter. The order book stands at £139m, some 7.4 per cent higher than at the end of December.

And the prognosis for the second six months of the year is also good. Peter France, the chief executive, is cautious about currency movements and commodity-price increases. However, he says that the order book and balance sheet make him confident of further progress for the rest of the year

However, investors might take a more equivocal view. Rotork's stock has gained 36 per cent since we last rated it a "hold" two years ago. But with steady increases of more than 27 per cent this year alone, and a full-year multiple of 20 times forecast earnings, it is time to cash in, take profits and look for better opportunities elsewhere. Sell.

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