Investment Column: Wait for impressive Autonomy to soften

Mothercare; Trafficmaster
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The Independent Online

Our view: Hold for now

Share price: 1205p (-113p)

Most companies and investors would have been delighted by Autonomy's second-quarter update yesterday, but there will have been some long faces among investors in the group, whose software allows companies to track phone calls, emails and messages, as the stock fell 8.6 per cent in trading.

The numbers were undoubtedly impressive: pre-tax profits were up a record 64 per cent on this time last year, earnings per share leapt 61 per cent, and revenues jumped 55 per cent. The chief executive Mike Lynch said the group would rather be cautious on the future and build expectations as the year goes on, but with much of Autonomy's business being regulatory driven, the market was disappointed by Dr Lynch's less than gung-ho outlook. Autonomy shares have had a great run for a FTSE 100 company, rising 41.7 per cent in the last year. The stock has stuttered in the last quarter, however, and the market appears to have decided that the shares are appropriately valued for now.

Dr Lynch argues that it is not his job to monitor the share price, but that trading on a price-earnings ratio of 14 times, the stock is at its lowest value for some time.

Maybe, but several analysts argue that now is a good time to take profits: advice that was clearly heeded by some yesterday.

"Autonomy's strong performance demonstrates that it offers resilient growth, since its key growth drivers (regulatory and acquisition) are unrelated to the macroeconomic environment," say those that Canaccord Adams, who actually advise clients to buy. "However, without significant financial outperformance or higher-than-expected acquisition benefits, we believe some investors may be tempted to take profits."

Autonomy is to some extent a victim of its own success, but that is not reason enough to buy. Over the long term, Autonomy is a very good bet, but we would pause at this level, expecting the stock to drift for a time. Hold for now.

Mothercare

Our view: Hold for now

Share price: 539p (+7p)

There are exceptions to every rule and the imperative to be dubious about anything on the high street should not necessarily be applied to Mothercare.

The baby products group issued a tub-thumping set of first-quarter results, saying sales were up 9.4 per cent in the 15 weeks to 10 July, with international sales up an impressive 32.7 per cent as the company pushes its overseas expansion. Even UK sales managed a 5.1 per cent rise.

However, while the group benefits from selling essential products, the only number that was not breathtakingly impressive yesterday was the rather tepid reaction of the share price to the good numbers, with the stock closing the day up just 1.3 per cent.

"Gosh," says its chief executive Ben Gordon when asked if he thinks the stock is already fairly valued, "better leave that to the market." Analysts at the group's broker, Cazenove, concede that "the valuation [the shares trade on a 2010 price-earnings ratio of 15.8 times] does, in our view, include some element of upgrade expectation, although we suspect nothing approaching the level [we think Mothercare is capable of]."

We would agree that there are reasons for to be confident. The only risk Mr Gordon can foresee is economic Armageddon, and with up to 100 overseas stores expected to open this year, there is potential for growth, he says.

The stock finished yesterday at its year high, but appears to be running out of steam. Mothercare is a quality stock, but investors will probably be able to get it cheaper in the not too distant future. Hold for now.

Trafficmaster

Our view: Cautious hold

Share price: 28.5p (-1.25p)

Buying Trafficmaster shares is a punt. Not our words, but those of the group's finance director, Tim Coleman. And Mr Coleman is spot on. Trafficmaster is a sound and well-run company, but its exposure to the high-end consumer car market, to which it supplies vehicle tracking and live traffic information, means that it will always struggle to attract investors in a downturn.

In fact, the shares have had a good run and are up 75 per cent in the past six months; according to the analysts at Panmure Gordon the shares are cheap, "trading at a price-earnings ratio of seven times 2009 and five times 2010, the stock looks undervalued."

The company issued its first-half trading update yesterday, saying that it was trading in line with expectations, with Mr Coleman pointing to its fleet tracking business doing well.

We think the discount in the stock is because economic conditions are not with the company. We see no sign of that changing. Cautious hold.

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