The Investment Column: Rising profit and earnings make G4S a secure bet

Hargreaves Lansdown; Antofagasta
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The Independent Online

Our view: Buy

Share view: 224p (-12.5p)

There are not too many companies that have made money for their shareholders in the past 12 months. One of those that has is the security company G4S, which before yesterday's interim results had seen its stock rise by 4.5 per cent in a year.

Before Group 4 Security and Securicor merged in 2004 to form G4S, the group had a reputation in Britain for losing prisoners that it transferred between courts and prisons. Now, however, the company is increasingly becoming known to investors as an attractive place to put money. Yesterday's numbers showed that G4S's pre-tax profits for the six months to 30 June were £109.4m – an improvement on the £96m posted for the same period last year.

Some people might think that companies feeling the credit-crunch pinch would cut back on security expenditure, but the evidence suggests otherwise. On most measures, G4S is flying and its earnings-per-share growth is up 26 per cent in the past six months, against an annual average of 15 per cent since 2004.

It may all seem too good to be true but, for those who appreciate hard numbers, the watchers at Cazenove reckon G4S is worth a punt. In valuation terms, they say: "G4S trades on a 2009 price earnings ratio of 10.8 times ... Securitas trades on a 2009 11.9 times. We believe G4S at the least deserves to trade on premium to Securitas, given the former's higher growth rate (11 per cent organic sales growth versus 6 per cent at Securitas)."

Analysts at Citigroup are more wary, saying that G4S's rating "looks about right to us" and there may not be huge gains to be made, but the company is one of the few to say it is not overly concerned about trading to the full year.

Yes, a cataclysmic recession would ruin an investment in G4S, but so it would also ruin punts elsewhere. In these tough economic times, it is much better to play safe and back a winner. Buy.

Hargreaves Lansdown

Our view: Sell

Share view: 167.5p (+6.75p)

If gongs were given out for honesty in business, the Hargreaves Lansdown chief executive Peter Hargreaves would win a gold medal. Yes, profits at the Bristol-based financial services company are up, but Mr Hargreaves admits that analysts who recommend selling its stock – because the next year is looking tough for the sector – are not far off the mark.

The group's interim results, issued yesterday, showed a healthy 42 per cent increase in pre-tax profits at £60.9m. The stock had been rising in recent weeks in expectation of these good numbers. Mr Hargreaves believes the group's success at servicing clients is behind the upbeat performance. He reckons that as his rivals (many of whom, he says, offer a less comprehensive service) struggle, so Hargreaves Lansdown will pick up new clients: assets under management during the six months to the end of June were up 9 per cent.

In a preview note before yesterday's update, analysts at Investec said investors should sell their holdings in anticipation of bad news about the outlook for the company. They were right. Mr Hargreaves says the forecast is "gloomy" and, if the past year has been tough, the next is only going to get tougher. "The group will be running to stand still," he warned. If he is correct and we are set for at least 18 months of recession, investors would be barmy to put money into an asset manager.

Perhaps Hargreaves Lansdown would be a great candidate for investment once the economy is showing green shoots of revival – but not now. Yesterday, Mr Hargreaves suggested that the current Government's time in office would go down as the longest period of economic mismanagement in history. Buying shares in his company now would do the same for an individual's portfolio. Sell.

Antofagasta

Our view: Hold

Share view: 5.92p (+22p)

Quite a few analysts are starting to say that the sell-off of mining stocks over the past few months has been a little bit overdone. The same claims were being made about the FTSE 100-listed Chilean miner Antofagasta, which posted a marginal increase in pre-tax profits yesterday. Its earnings were up $300,000 to $1.7m and, although the figures were hardly breathtaking, they were described as being as solid as a rock by analysts at Numis, who upgraded the stock from "sell" to "hold". The problem for Antofagasta, they added, is that "consensus copper price estimates for 2009 are uncomfortably high", and companies mining steel components are more attractive. Rot, said analysts at Citigroup, who suggested that Antofagasta stock was dramatically undervalued and its shares should be up at levels closer to the year's high of 874p.

The truth is probably somewhere in the middle. Costs remain an issue for Antofagasta and uncertainty about commodity prices means investors should not rush head-long into buying its stock. Some funds are listening to what the experts are saying and the shares have done well, rising 20 per cent in a month. However, it may be a while before investors can be certain that the dip of three months ago was just a blip. Hold.

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