Sharply rising coal price may undermine Drax

Drax

Our view: Hold for now

Share price: 739p (+2.5p)

If the price a company can get for what it produces increases faster than the price of its costs, it makes money. That simple equation has helped the coal power station operator Drax in recent months: the price of coal has surged, but not as quickly as the price it gets for its power.

The company reckons its future is bright, and said in yesterday's trading update that full-year earnings will be ahead of analyst consensus, which the group says is about £400m. What is more, despite the price of coal continuing to rise, the group has managed to lock in the margin it currently generates, by signing plenty of forward sales contracts.

This, the chief executive Dorothy Thompson says, is largely responsible for the stellar performance of the stock in the last six months: the shares have shot upwards from the 486.75p towards the end of January.

The analysts are split on whether now is the time to buy. Merrill Lynch reckons that Drax is the best UK stock to be exposed to "the energy price macro," adding that earnings will have increased 25 per cent by 2010 and that the stock will reach 1000p in the next 12 months. Accordingly, Merrill Lynch has upgraded its recommendation from "hold" to "buy". However, the watchers caveat their predictions by saying: "Drax's valuation remains very sensitive to assumptions surrounding volatile commodity prices, especially given its price-taker business model."

Ms Thompson says that in the last two weeks, coal prices are up sharply, and that the group is unable to pass on these higher costs.

UBS says it is concerned that forward sales may disappoint, and despite earnings showing strong growth, the experts advise clients to sell.

The company says it has a policy of returning excess cash to shareholders, and expects the pot to be worth £100m this year, down from £165m 12 months ago.

Commodity prices are very volatile, and while investors have done well out of Drax in the last year, increasing coal costs have the potential to be damaging. Buyers should be cautious for the time being. Hold for now.

Carillion

Our view: Buy

Share price: 332.75p (+13p)

As the credit crunch bites, outsourcing companies become increasingly attractive. As businesses start to feel the pinch, they try to save costs by letting others take on non-core activities, so the theory goes.

Judging by Carillion's trading statement yesterday, the theory seems to be sound. The company reckons that it will achieve double-digit earnings per share in the first half-year, compared with the same period last year. The group's order book stands at £20bn, compared with £15.8bn last year, with the stock closing up 4 per cent last night.

Most know Carillion as a construction company, but that division now contributes just 10 per cent of UK profits. Yes, the group has a hearty construction division in the Middle East, but that region is booming,and anyway, Carillion does not tender competitively, rather it negotiates its own contracts.

The company is very confident. A spokesman identifies few risks. A full-blown recession may hit construction next year, but that division is a small part of what the company does. World War Three is also a risk, suggests the spokesman, implying there is little to worry about.

The experts like the group, too. Those at Panmure Gordon reckon that the integration of McAlpine, which it bought in February, will help to save costs, and that the group should achieve a share price of 410p within the year. The analysts argue that trading at 9.9 times estimated 2008 earnings, the group looks cheap to rivals such as Balfour Beatty and Interserve. They add that the broader support services sector trades on a forward price earnings ratio of 13 times.

Although of course it can never be ruled entirely, World War Three does not look likely any time soon. As such, investors would be wise to buy Carillion. The sector is one of the safest around, and the opportunity to buy a company that presently trades at a discount to its peers should not be readily passed up. Buy.

Clapham House Group

Our view: Buy

Share price: 109p (+5.5p)

With the UK economy seemingly heading south at a rate of knots, investors would be forgiven for assuming that something as consumer-led as restaurants are to be avoid at all costs.

Not so, says Clapham House, which owns a number of eatery chains, including Gourmet Burger Kitchen and Tootsies. The group yesterday posted a 30 per cent rise in profits, and while the number of new outlet openings has slowed, the group expects to add as many as 18 restaurants this year.

The company did sound a warning that the economic outlook is somewhat uncertain, but the analysts largely brushed this off. Those at Numis say that the stock will reach 123p and that buyers should form a queue to buy.

The chief executive,Paul Campbell, says that Clapham House is founded on venture capital lines,the implication being that it would listen to bids forits constituent parts. The UK economy is certainly going to be rocky regardless of what investors buy. The fact that offers for the group would be welcomed, presumably at a premium to the present price, should encourage buyers whoare happy to take a punt. Buy.

Voices
On the last day of campaigning before the polling booths open, the SNP leader has written to voters in a final attempt to convince them to vote for independence
scotland decidesIs a huge gamble on oil keeping First Minister up at night?
Arts and Entertainment
Rosalind Buckland, the inspiration for Cider with Rosie died this week
booksBut what is it like to be the person who inspires a classic work of art?
Life and Style
techApple has just launched its latest mobile operating software – so what should you do first?
News
A male driver reverses his Vauxhall Astra from a tow truck
newsThe 'extremely dangerous' attempt to avoid being impounded has been heavily criticised
PROMOTED VIDEO
Arts and Entertainment
Lionel Messi in action for Barcelona
filmSo what makes the little man tick?
Arts and Entertainment
tvReview: An undercooked end (spoiler alert)
News
i100
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Pharrell dismissed the controversy surrounding
musicThe singer said 'the last thing I want to do is degrade'
Sport
Cesc Fabregas celebrates his first Chelsea goal
footballChelsea vs Schalke match report
Arts and Entertainment
Toby Jones (left) and Mackenzie Crook in BBC4’s new comedy The Detectorists
tvMackenzie Crook's 'Detectorists' makes the hobby look 'dysfunctional', they say
Life and Style
fashion

Olympic diver has made his modelling debut for Adidas

News
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

Recruitment Consultant - Soho - IT, Pharma, Public Sector

£20000 - £25000 per annum + OTE £35,000 first year: SThree: The SThree group i...

Sales Executive

£20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week