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Investment Column: Time to buy ever-improving Weir Group

Weir Group

Our view: Buy

Share price: 1,066p (+115.5p)

The engineering group Weir issued a surprise update yesterday, revealing that trading over the nine weeks to the 4 June had been stronger than expected. Particularly encouraging was the disclosure that original equipment orders had begun to increase, auguring well for the year ahead. In constant currency terms, Weir now expects second-half profits to be significantly higher than the levels booked last year.

The company also unveiled the acquisition of Linatex, a Malaysia-based producer of pump seals and other wear-resistant rubber products. The deal gives Weir increased traction in the fast-growing emerging markets and, given the fragile nature of the recovery in the West, makes the long-term investment case that much more attractive.

Crucially, the valuation is also supportive. The bears will no doubt highlight the fact that Weir is up strongly since the beginning of the year. But that's hardly a surprise, in our view, not least in light of the improving outlook for engineering and industrial companies. Moreover, in terms of enterprise value to earnings before interest, tax, depreciation and amortisation, Weir trades on a multiple of 7.4 times. That compares favourably to a sector average of 7.8 times, according to Bank of America Merrill Lynch. Buy before that gap closes.

3i Group

Our view: hold

Share price: 292.1p (+4.2p)

There was a time, not too long ago, when those in the private equity industry where described as the new "masters of the universe". It was not a moniker those in the industry did much to discourage.

That was until the credit crunch pulled the carpet from underneath the leverage buyout market and those masters began to look more than a little silly. As the only major listed private equity firm in the UK, 3i, which bought the likes Interflora during the boom years, has attracted a fair amount of attention as a result of its public status.

Yesterday, 3i up bought back a number of outstanding bonds, which should give investors a degree of confidence that the group is generating plenty of cash. The group denied that it is buying the securities because there is nowhere else to park its £2.7bn of liquidity.

Nonetheless, the group's share price has had a disappointing last 12 months. As other stocks have emerged from the recession with something of a bounce, 3i's shares have stuttered, putting on just 5.6 per cent in the last year. The dividend yield of just a touch over 1 per cent is not sufficiently worth writing home about to entice those unimpressed by the stock's performance.

However, there is an investment case for the optimist. The banks are making lots of money again and are under pressure from a new government to lend more money, which will help the likes of 3i launch raids on a still largely undervalued corporate sector. The company's shares are also pretty cheap given the lack of growth in the last 12 months, which will make them attractive to some backers.

We are not convinced. The stock is cheap enough to be interesting, but it will be a long time before the private equity industry returns to its glory days of the middle years of the last decade. As a listed group, 3i suffers from the sector's damaged reputation. Hold.


Our view: Buy

Share price: 685p (+15p)

Anyone travelling on London's Underground system can't help but notice men in their twenties and thirties wearing SuperGoup's Superdry brand. And SuperGroup yesterday signalled its growing international ambitions by revealing plans to launch in the UAE this summer.

The franchise deal is the first unveiled by SuperGroup since it floated at £5 a share in March to expand its international footprint from 30 countries where its products are sold to 50 over the next three years.

In addition, City analysts see the potential for SuperGroup, which also operates the Cult retail chain, to ramp up its womenswear offer and substantially beef up its UK presence of 45 standalone stores and 56 concessions. While its shares trade on a 2011 price to earnings ratio of 14.4, we think this is a relatively modest premium to the rest of the retail sector considering SuperGroup's growth potential.

More recently, SuperGroup said it expects underlying annual pre-tax profits of no less than £25.7m for the year to 2 May.

And, for the next year at least, we expect SuperGroup to remain in fashion with investors. Buy.