The Investment Column: Fuel cost hedges put Arriva on the right track for investors

Thorntons; RPS
Click to follow
The Independent Online

Our view: Buy

Share price: 638p (-24.5p)

Any transport group must be daunted by the growth in the price of oil, which is now heading unchecked towards $120 a barrel. However, for investors looking at the sector, Arriva, the bus and train operator, has some qualities that make it stand out from the crowd.

The group published a trading statement yesterday, coming just a month after the company's results, which showed a 7 per cent increase in operating profits to £128m. The group said it was "positive" on its outlook. Investors will be encouraged by the fact Arriva has fuel cost hedges in place for the rest of the year and already has 57 per cent of its fuel costs hedge for 2009. The cost of the hedge has increased to an average of 33p a litre, up from 27p, but analysts are encouraged that the policy is good for the group: according to the group; consensus revenue growth, among watchers is 46 per cent, with earnings per share growth at 24 per cent for 2008.

One analyst said the group delivered "substantial earnings growth" that was likely to continue this year. He had the target price for the group at 850p, which he expects it to reach.

Furthermore, the fundamentals of the company are pretty strong. It has an advanced order book of £12bn and revenues have grown by more than 60 per cent in the first three months of this year, largely after taking on the CrossCountry rail franchise between Aberdeen and Penzance.

The company argues that because it generates two-thirds of its revenues from government revenues, rather than from ticket sales, it is a defensive stock, which investors should pile into.

The risks are obvious. Despite the hedging policy, a big rise in the cost of fuel would eat into growth: the company concedes it has already seen "substantial" hikes in fuel costs this year. That said, most analysts see the group as a buy; there is little reason why investors disagree. Buy.


Our view: Sell

Share price: 142p (-8.25p)

The perceived wisdom is that retailers on the High Street are struggling against a backdrop of increasingly nervous consumers, with food retailers facing a double whammy as the cost of ingredient soars.

However, so far the confectioner Thorntons is making a pretty good fist of it. The group announced its third-quarter numbers yesterday with sales up 8.5 per cent to £54.4m.

Its chief executive Mike Davies says that the group had delivered on its promise of a sixth consecutive quarter of growth.

The market, however, is less than impressed, with the stock trading more than 5 per cent down on the day. The group's own brokers at Dresdner Kleinwort downgraded profit forecasts by 9 per cent saying that the company was already trading at a premium to its peers, with sales growth already priced into the stock.

The group suffered a hike in costs due to poor planning over Christmas, which meant it had to keep production sites open for longer, paying staff more. Mr Davies said that this was a one-off due to the early Easter and won't happen again for another 100 years, but watchers at Shore Capital say that the fact that this was not legislated for is a "concern".

Those at Shore reckon, however, that sales growth up to now has been creditable, given the economic environment.

The problem for Thorntons is that it will get dragged down by the problems facing the retail sector. The group is at pains to point out that each of their businesses is performing and that it is being innovative with their products and shops. Analysts agree that forgiving the slip over Easter production, the group is doing all it can. Sadly, the investment case falls at the first hurdle. If investors do not need to be exposed to retail, there is no real argument for buying Thorntons. Sell.


Our view: Buy

Share price: 314p (+7.5p)

RPS, the environmental and resources management consultancy, reckons it is on to a good thing.

Its chief executive Alan Hearne, who has been in the job for 23 years, says that the group is benefiting from two of the main issues of the day.

It is making money from advising on increasing energy prices and climate change. Mr Hearne also reckons that the group is pretty much protected from the credit crunch saying that his biggest problem is finding and retaining "talent".

Analysts disagreed about whether or not the group's position was already priced into their shares. Those at Altium, who recommend a buy for the group say that "all the trends are in the right direction and this can only push the share price up."

There are not a huge number of similar companies to judge the stock against, but watchers at Panmure Gordon, while happy to celebrate the group's success, believe "the group is making progress but much of that is already priced in. They pretty much trade at a 30 per cent premium to their peer group". They advise clients to sell, seeing little upside in the stock price for the rest of the year.

To buyers looking at the group simply as an alternative to other sectors such as financial or retail stocks, the company looks pretty attractive. It is difficult to see RPS having anything other than a good 12 months. Buy.