Investment Column: Thin valuation seals the deal for Cookson

Devro; Umeco

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The Independent Online

Our view: Buy

Share price: 597p (-35p)

Cookson, the engineering group, may not be the most fashionable of companies, but it has been something of a star for its investors – at least until very recently.

The company has been buoyed by the continued rebound in the world's steel and electronics market, and, as far as the numbers are concerned, it is ticking all the right boxes. Yesterday Cookson again provided evidence that its recent success is sustainable.

Pre-tax profits grew 27 per cent to £132.1m on revenue of £1.4bn, up 12 per cent. Those figures were slightly ahead of hopes, and the company said it also expects the full-year numbers to be ahead by a similar degree.

Cookson – whose products are used in the glass and solar industries in addition to being used by steelmakers and in foundries – has not been immune from the impact of rapidly rising raw material prices. Crucially, however, it has been able to pass those price rises on to its customers. The company is also well positioned in key sectors, with an enviable market share.

We were buyers at 431p last summer and then again at 680.5p in January. So, it it time to take profits, or add to our holdings? To be sure, the stock has been volatile in recent months, although the trend is essentially flat. Yesterday, it slipped again, and now sits a good way below our second buy recommendation.

But as result of the recent falls, it is also starting to look very cheap on valuation grounds, trading on a rating of just 8.8 times forecast 2011 earnings, with an acceptable prospective yield of 3.4 per cent. There is a perception among investors that the company may find it tough to hit its targets (Cookson is looking for a 12 per cent return on sales). If it loses its pricing power, that could happen.

Then there are also the ongoing worries about the global economy, rising again thanks to the kerfuffle over America's debt in Washington DC.

While we acknowledge the concerns, we'd point out that Cookson remains a fundamentally strong company. Moreover, putting the recent volatility aside, we can't ignore the fact that at their current levels, the shares look undervalued. Buy.


Our view: Buy

Share price: 262p (+9p)

Russia and Eastern Europe are consuming more and more meat, according to Devro, which yesterday released forecast-beating results for the first half of the year.

The manufacturer of edible collagen casings, otherwise known as skins for sausages and similar meat-based products, saw its pre-tax profit rise 19 per cent, although its revenue only grew 2.4 per cent.

Those of a squeamish disposition may want to look away, but it was particularly proud of the performance of its Select brand – a premium range which, to quote the company itself, "is specifically designed to replicate the characteristics of sheep gut".

There was also the news that it had sold its German distribution unit for €1.9m, and although the disposal may not involve major sums, it should be well-received if, as the company promises, margins are boosted as a result.

Making the investment case more attractive is the fact that before the figures came out Devro's share price had dipped nearly 15 per cent in less than three months. This despite the widespread belief that the collagen casings market will continue to grow. With yesterday's update showing the company is also performing well, we think the stock may yield some tasty gains.


Our view: Buy

Share price: 363.75p (-4.63p)

The past few months have seen some major changes at Umeco, most notably the selling of the supply chain arm to focus on hi-tech materials known as advanced composites.

These materials, used by aircraft manufacturers and others, are light, durable and, importantly for investors, boast high margins. By focusing on them, Umeco has placed itself at the centre of a growing market, as new industries turn to advanced composites. That's the long-term story. In the short term, yesterday's trading update showed that Umeco had made a good start to the year, with revenue from continuing operations up 12.7 per cent on the same period last year.

The shares, however, are down some 30 per cent since the January peak. Although the market may be adopting a wait-and-watch approach in light of the recent changes, we would recommend buying for the long-term growth now in prospect.