The Investment Column: Keep Vodafone on hold, but stock is no cash cow

Micro Focus; NWF Group
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The Independent Online

Our view: Hold

Share price: 139.9p (-2.5p)

As one of the biggest companies in the UK, lots of people own Vodafone shares. That of course does not mean that buyers are guaranteed returns and those that bought at 195p last November have had very little to cheer about since.

The group issued its first quarter numbers last month, which were described at the time as "really bad," sending the stock tumbling below an average of Vodafone's European peers.

Of course, a fall in share prices presents opportunities and several analysts recognised that the stock was undervalued. If further evidence was needed, the board has been buying back stock since, and no management team worth its salt does that unless it thinks it is getting value for money.

Experts at Deutsche Bank argued at the time that, "Vodafone shares have been sold off on weaker European top line growth despite group Ebit and FCF guidance being maintained. We believe the market has overreacted and though Vodafone's top line is exposed to the economy, profits and FCF are much more defensive." The analysts have the group on a buy recommendation.

However, the backing is not universal for the group that announced yesterday that it intends to open 50 new stores in the UK. Last week, experts at its own brokers, Goldman Sachs, downgraded the stock from buy to hold saying that the share price had recovered after the sell-off and that the upside potential in the stock, which would see the share price reach 175p, was now on a par with the rest of the European sector.

Couple to this Vodafone's particular problem – its exposure to the "cracked" Spanish market – and the investment case for the group that was made by most of the observers after the first quarter results looks weaker.

Vodafone is a strong company and anyone buying a portfolio of stocks would consider adding the group for stability. They are unlikely, however, to come to regard the investment as a cash cow. Hold.

Micro Focus

Our view: Hold for now

Share price: 286.75p (+18p)

It is pretty tough to find a bad word to say about software group Micro Focus. The company issued an upbeat trading statement yesterday, saying that everything is going well and that earlier estimates of double-digit growth are bang on target.

The bad news for potential investors is that the message is already getting across and yesterday's announcement led to a 6.8 per cent spike in the stock, taking it to just shy of the 300p target price predicted by a number of analysts, including those at Numis, UBS and Piper Jaffray. This group of watchers all say that investors should buy the stock, but arguably it is no longer worth the trouble if new buyers are looking to make piles of cash as opposed to parking their cash.

Chief executive Stephen Kelly argues that a number of watchers now rank Micro Focus in the same category as the likes of Autonomy, which is four times the size and trades on a price earnings ratio of 43.8 times, compared to Micro Focus's 16.5 times, indicating that the group is dramatically undervalued. Maybe, and because of the defensive nature of the company's work, which is modernising existing IT infrastructure, it deserves to trade at a premium but the stock is unlikely to rise much beyond where it is now – if the experts are to be believed.

There is nothing wrong with the group at all. Indeed, it is very well run with a strong record of cash generation, no debt and a margin approaching 40 per cent. Mr Kelly reckons that he can save his customers, which include the likes of Boeing, Royal Bank of Scotland and Tesco, as much as 90 per cent of their IT costs. Investors, sadly, will not be so fortunate: if they want safety then they should pile into Micro Focus, but not if they are intent on big returns. Hold for now.

NWF Group

Our view: Hold

Share price: 89p (+6.5p)

The share price of specialist agricultural distribution group NWF ended the day up 7.9 per cent yesterday after the company announced its annual results.

Pre-tax profits, at £4.2m, were down from £5.8m last year, and as part of the announcement the group said that, "the overall economic outlook for the group remains uncertain due primarily to the unpredictability of feed commodity prices and demand for fuels in the light of recent record oil prices." Hardly, it would seem, a nailed-on buy for new investors.

The numbers were, however, ahead of most analysts' estimations and the performance is clearly an improvement on the start to the financial year, when the group said that all was not well: bad weather had knocked garden centre sales (a division it is now selling) and feed had been adversely affected by high commodity prices.

Watchers at broker Charles Stanley argue that the second half of the year was very strong. They add that agriculture-focused businesses average a price earnings ratio of 10.9 times, while transport groups trade on 13.4 times, compared to NWF's 12.3 times. This may not be enough to convince investors to buy now, especially with the company itself saying that the outlook is uncertain. Hold.

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