Investment Column: The LSE sails through choppy waters
JD Wetherspoon; Mitie Group
Thursday 15 July 2010
Our view: Buy
Share price: 626.5p (+22p)
The London Stock Exchange has had a rocky ride recently, so much so that after moving back into the FTSE 100 index of blue chips stocks, it was booted off again in the June index review.
The weakness means that when it comes to valuation, the shares seem to promise value, with LSE trading on a multiple of 9.7 times forward earnings, according to Numis.
The question is whether Xavier Rolet, the ex-Lehman Brothers banker who succeeded Dame Clara Furse as the group's chief executive, can steer this ship through market conditions that are likely to remain uninspiring – the company used the term "mixed" in an update published yesterday – over the coming months.
If he can, the market should drive this stock back into the benchmark index. If not, it may simply drift as the dust thrown up by the recent market turmoil settles.
Crystal ball gazing is a tortuous occupation at the best of times but for what its worth, we think that UK market share will be one of the defining issues when it comes to performance. As Numis noted yesterday, LSE still has much to do on this account, but the auguries are promising.
Recent price changes have made the LSE more competitive, and compared to April, the exchange's share of trading of UK cash equities was up in June. Crucially, LSE also made gains on the competitive FTSE 100 market, with its share rising from 54.8 per cent in April to 57.4 per cent in last month.
This suggests that, despite its shares being down around 14 per cent since the beginning of April (part of which, it must be said, was probably down to the general weakness in sentiment as Europe dealt with its sovereign debt woes), the LSE is having some success in stopping business from shifting to other venues.
Mr Rolet and his team are clearly on the right track. Given the undemanding valuation, we're willing to stake our bets on further success. Buy.
Our view: Buy
Share price: 422.5p (-15.2p)
The World Cup was not a big event for the pub group JD Wetherspoon, which eschews Premier League football matches in order to provide a quiet drinking environment.
It did, however, show the England matches with the sound on (it may now regret the move), although it was off for the other games during the tournament.
Despite this, Wetherspoon's underlying sales rose by 1 per cent for the 11 weeks to 11 July, an improvement on its third quarter. The group, which has 783 pubs, is thought to have benefited from the growing popularity of its breakfast offer and robust sales during the hot weather.
To further perk up its breakfast sales, Wetherspoon recently started serving cafe lattes or cappuccinos for 49p between 7am and 9am at the vast majority of its pubs.
The consensus in the City is for Wetherspoon to deliver a 9 per cent uplift in pre-tax profits to £71.8m for the year to 11 July, compared with £66.2m last year.
Perhaps a more interesting note for potential investors is that analysts at Investec and Panmure Gordon have a "buy" recommendations on Wetherspoon, with a share price target of around 590p.
This is largely based on its aggressive roll out of 250 new pubs to the end of 2014 and the reasonable value of its shares, which trade on a 2011 price-earnings ratio of just over 12. Buy.
Our view: Hold
Share price: 215p (+0.1p)
This column is very concerned about the effect of government cuts on companies that depend on winning infrastructure contracts.
Mitie is one of them, and yesterday followed a number of peers in the sector and updated the market on recent goings-on. Mitie said that it has experienced no change in public sector markets of late, which of course, is to be expected since the cuts are yet to be implemented. The group also said that it remains on track for profitable growth, but that did not stop a number of analysts taking the announcement as a cue to pare back share price estimates.
On a valuation basis, Mitie is compelling. Trading on a 2010 price-earnings ratio of 10.3, and offering a dividend yield of close to 4 per cent, it would very difficult to sell the shares, even with the cuts serving as something close to a herd of elephants in the room.
The whole sector makes us very nervous, but we are persuaded that Mitie is a well organised and well run company. We would therefore hold on the stock, watch the divi roll in, and keep our fingers crossed. Hold.
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