The Investment Column: A nice surprise from L&G, but it looks pricey

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Legal & General

Our view: Hold

Share price: 108.3p (+11.7p)

Nice surprises have been few and far between for investors in recent months, which makes yesterday's prediction-busting first-half figures from the insurer Legal & General all the more welcome.

Analysts spent the day scrambling back to their desks as the firm reported operating profits on the industry standard European embedded value basis of £626m, sending the stock up by 12.1 per cent. The group has benefited greatly from companies outsourcing their pension fund liabilities, seeing its annuities business grow by 100 per cent by sales, more than compensating for the firm's mortgage protection arm, which dipped by 11 per cent.

All this is genuinely good news, and the market should rightly celebrate Legal & General's first-half success. The only problem is that you are not going to make any money on the shares by buying now as the stock already trades at fair value, at best. Watchers at Keefe, Bruyette & Woods argue that Legal & General is "a little expensive. We see the company at a price to market-consistent fair value of 74 per cent versus a peer group average of 69 per cent." Lehman Brothers says that buyers would be better off buying Prudential, which has "momentum and catalysts, as well as valuation, on its side". Even the group's own broker, UBS, says that while the numbers were better than expected, the target price for the stock is 100p, giving a neutral rating.

Legal & General has done a tremendous job in the first half of the year, but is already suffering from investors appreciating the fact. For buyers that already own the stock, holding on will be worthwhile, especially as the insurer has increased the interim dividend by 7.5 per cent. If the housing market suddenly improves, giving the company a boost in its mortgage protection business, new investors should flock to the stock. That is unlikely, and those not already onboard have probably missed the boat. Hold.


Our view: Hold

Share price: 1111p (+24p)

Despite the credit crunch, there are still plenty of companies doing nicely. One of them is Rotork, which manufactures actuators, the mechanisms that control the opening and closing of pipeline valves in the exploration and water industries.

The company has enjoyed making hay while the sun has shone, taking advantage of oil and gas customers tapping fields that were too expensive to use before the surge in energy prices. Indeed, the group is one of the few to have seen its stock price rise this year, and yesterday announced a 24 per cent hike in first-half pre-tax profits.

However, every silver lining comes with an inevitable cloud. While the group has provided much cheer for investors, it is now too expensive to buy. Despite yesterday's stellar numbers, the stock was up a modest 2.2 per cent, indicating that the market does not see much more room for growth.

"The shares trade on price earnings of 19.6 times, which we feel is too high in the current markets, trading on a premium to the oil service sector. We continue to rate the group as the highest quality, well managed stock in the sector, but this is already reflected in the share price," say watchers at Royal Bank of Scotland.

The group's own brokers at UBS also point out that the group trades on an estimated 2008 EV to Ebit multiple of 13.7 times against a European sector on 8.4 times. The chief executive, Peter France, argues that the analysts said exactly the same last year and the shares have made gains regardless. Investors, however, would do well to wait. Hold.


Our view: Buy

Share price: 229p (+20.75p)

Long-term investors in GKN, the car and aeroplane parts maker, eventually had something to cheer about yesterday when the group's stock rose by 10 per cent on news that half-yearly pre-tax profits were up £6m to £131m. About time too, the investors are no doubt thinking, after seeing the shares come off by 45 per cent since the start of the year.

The chief executive, Sir Kevin Smith, says that much of the reason for the poor performance of the stock has been down to perception and on nervousness about the North American car makers. Indeed, in the US the auto giants GM, Ford and Chrysler surprisingly contribute just 7 per cent of the GKN's revenues.

One thing that had legitimately kept investors awake at night, however, was the spiralling increases in raw material costs. The group has hitherto passed on about 50 per cent of this to customers. This needed to change, concedes Sir Kevin, and following negotiations with its biggest customers, about 80 per cent of input costs will feed through to clients in the second half of the year.

For investors new to the group, the good news is that the experts expect more from the stock in the second half. Yes, there is likely to be softening, especially in the group's civil aerospace division, but on a price earnings ratio of just 7 times for the year, as well as a 6.7 per cent dividend yield, investors should be tempted to take a punt. Buy.