Investment Column: Time to get on board Stagecoach's train

Photo-Me International; Imagination Technologies
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The Independent Online

Our view: Buy

Share price: 157.8p (+7.9p)

Stagecoach, the bus and rail operator, proclaimed itself pleased with yesterday's half-year results: pre-tax profits were £75.5m, versus £105.2m this time last year, while earnings per share dropped to 9p, from 12.1p in 2008. But finance director Martin Griffiths says the numbers were good given the economic climate, and because fuel and pension costs had jumped.

And investors can cheer the 2p hike in the interim dividend, which makes the case for holding the shares that much easier (although the 400 people that have been made redundant at the group's rail division will wonder just how vital the cost-cutting actually was).

Looking at Stagecoach, investors need to distinguish between the impressive bus division and the rail operation, which has found life tougher: Stagecoach's South West trains arm has struggled as the number of people travelling into London to work has dropped off in recent months.

Mr Griffiths insists that "the 10-year time horizon" for rail is strong, driven by higher levels of road congestion and concerns over the environment. We agree, although the shorter term may be trickier as unemployment continues to tick up in the next year.

Mr Griffiths also claims that the shares are cheap, arguing the market still has concerns over rail and a dispute with the Government about revenue protection for its rail franchises; the case that will be settled in the spring.

We would be tempted to take a chance on Stagecoach. City job vacancies were actually up 15 per cent in November, according to numbers published yesterday, while the dividend yield of 4.4 per cent, and the undervalued nature of the stock, which trades at 10.2 times Stagecoach's April 2010 price earnings rating, makes a bet on the stock that much easier.

The wheels could certainly come off, but on balance, we're happy to hop on Stagecoach at this stop. Buy.

Photo-Me International

Our view: Sell

Share price: 39p (-6p)

Photo-Me International, the global photo booth operator, has had plenty of reasons to smile at the camera in the second half of this year, after a troublesome 18 months when its future was in doubt. As recently as 3 February the shares were trading at a lowly 9.25p, but since then they have rallied strongly, and the top and bottom line have been heading in the right direction. The company yesterday posted a 72 per cent uplift in underlying pre-tax profits to £11.2m in the six months to 31 October 2009, boosted by the weak pound and reduced costs. Revenues at Photo-Me – which has nearly 21,000 photobooths and 4,900 digital media kiosks – also rose by 9 per cent.

Perhaps more importantly, the company is now generating healthy net cash and has no net debt, having shed £45m in the last 18 months. Investors also said "cheese" to the company resuming its dividend payment, of 0.25p a share. However, the market was spooked a little by the language of Hugo Swire, the chairman, who said that "market conditions remain extremely difficult. Accordingly, the board is hopeful, rather than confident, that the second half will be profitable".

Furthermore, the shares now look pricey and trade on a forward 2010 price to earnings ratio of 22.9. On the upside, Photo-Me is diversifying its revenues by selling more of its self-service kiosks to third parties.

Still, while this roll-out will boost revenues next year, they are unlikely to be game-changing for a while. The company's overall financial health looks better than for some time, but given Mr Swire's comments and the toppish valuation, we say sell.

Imagination Technologies

Our view: Buy

Share price: 224p (+6.4p)

Imagination Technologies designs technology used in the chips for products from mobile phones and sat-navs to digital set-top boxes. Manufacturers ask the company to draw up "technology blueprints" for certain capabilities, such as graphics. Imagination then receives a licensing fee, but it also gets royalties for each device sold. As these include Apple's iPhone 3GS, the Palm Pre and a host of other smartphones, the future looks rosy. In the first half of its financial year, 54 million devices with its technology were shipped, a jump of a third year-on-year.

The group released a solid half-year statement yesterday driven by strong sales of chips and royalties, as well as growth abroad.

Revenues were up 40 per cent to £38.2m, while profits rose more than five times to £4.4m. The pure digital radio arm also swung to a £400,000 profit this year after a loss of £1.3m last time, and international expansion will follow. The second half should be even better for royalty revenues as it includes the lucrative Christmas period, when gadget sales obviously rocket. The licensing revenue is also expected to show stronger growth, although it is harder to predict. Despite that slight uncertainty and potential threats from the wider economy, the stock has further to go. Buy.

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