Investment Column: Wincanton has more ground to lose yet

Chloride Group; Wolfson
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The Independent Online

Our view: Sell

Share price: 148p (-3.75p)

The haulage and logistics group Wincanton's interim management statement yesterday was as optimistic as possible, laden with glass-half-full points such as new business being added and costs being saved. Sadly, the market was having none of it, with the stock falling 2.5 per cent after the company conceded that "we do not expect, however, that either new business wins, or the major programme of cost reduction initiatives under way, will fully offset the negative impact of economic slowdown on certain of our activities".

The problem for Wincanton, and therefore investors, is that the group's performance is inextricably linked to that of the economy. If you think that the green shoots of recovery are on the way, jump in, because trading on a 2009 price earnings ratio of 6.3 times, the stock is "not expensive", according to watchers at Investec, who advise clients to hold the shares.

The punter who prefers a more touchy-feely assessment will wonder what utility there is in buying a stock that has travelled south as fears of a recession increased. So far the shares have lost nearly 60 per cent of their value in the last 12 months. Graeme McFaull, chief executive, concedes that the group acts as a bellwether for the economy, but adds that the industry will be one of the first to benefit from a recovery. Wincanton is in a strong position, he says, and will emerge stronger from the entrails of the recession.

Mr McFaull does concede in yesterday's update that the year's financial performance will come in "around the lower levels of analyst forecasts for the current year", with analysts at the house broker, Cazenove, arguing that despite conditions staying "challenging for the group in the year ahead... management has potential to take out further capacity and costs should it need to."

We recognise that a falling share price will increase the dividend yield, but fail to understand an argument that advocates holding a falling share in a recession that is getting worse. Wincanton is a good company and will survive, but the shares will get cheaper and buyers should wait. Sell.

Chloride Group

Our view: Buy

Share price: 154.25p (+20.75p)

Tim Cobbold, chief executive of the critical power supply group Chloride, says that not a single major investor has complained bitterly to him since the company turned down a 270p-a-share offer last May.

The reason, perhaps, is that the company continues to do rather well, despite the recession. Mr Cobbold says he will not be drawn into the predicting-the-future game after the group said in its interim management statement yesterday that everything was fine: third-quarter trading was in line with expectations, the balance sheet is strong, and the company "throws off" cash, he says.

Investors who want a safe punt, or as safe as you can be in these markets, would be well advised to buy. Mr Cobbold also argues that Chloride's performance justifies its sector premium. So do watchers at Investec, who reckon that "on our forecasts, Chloride continues to trade at a 2009 price earnings ratio premium to its electronics and electricals peers [and] deservedly so, in our view."

Frankly, there are few compelling reasons not to buy. The group is proving adept at doing well in these uncertain times, and the stock, which is down 25 per cent in the last 12 months, is outperforming the market. Investors could also benefit from any return from Emerson, which would act as an insurance policy against the stock price staying low, even if the company does not like the idea. Buy.

Wolfson

Our view: Cautious hold

Share price: 77.75p (+6.5p)

It has been a tough few weeks for the semiconductor producer Wolfson Microelectronics. Two weeks ago the group was fined by the Financial Services Authority for failing to disclose information about a loss-making business, and yesterday the company said that fourth-quarter revenues were down a whopping 48 per cent. Operating profit fell to $100,000 from $14.4m in the same period last year.

To the group's favour, it has no debt and is cash-generative, but there is so much uncertainty about the economy, the company refused to give revenue guidance for 2009.

The shares were up yesterday, with investors impressed by Wolfson's cost-cutting. Watchers at Citigroup say that the shares will reach 90p and that trading on 3 times enterprise value to Ebitda, the company trades on a par to its peer group.

Wolfson can cut more costs, and that fact, coupled with yesterday's market reaction, with the shares up 9.1 per cent, would convince us to hold on for a little while longer. Cautious hold.

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