The Investment Column: Sage's wise strategy makes for a resilient stock

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Our view: Cautious hold

Share price: 197.70p (-0.2p)

While it seems like an obvious point to make, the software group Sage said yesterday in a trading statement that market conditions are "challenging": business-speak for pretty nasty.

What is noteworthy about that, say watchers at Evolution, is that it is the first time the company has said it. "The tone of the statement has worsened from the interim results," they say, and have a "reduce" recommendation on the stock.

Sage's finance director, Paul Harrison, says that most analysts were reassured by what the company said. However, sentiment is important in these markets, and the slightest change of position can have disastrous results for the share price.

In fairness to Mr Harrison, the market did not appear to pick up on the Evolution comments too readily, with the shares closing only marginally down. This is probably because the company expects to meet full-year expectations, which most analysts predict will come in at £1.3bn of revenue. Moreover, at a September 2008 price earnings ratio of 13.5 times, Sage trades at a discount to its peer group.

Sage targets small and medium-sized clients, which may be another reason for its resilient stock. The company has 5.7 million customers in 22 countries around the world, meaning that when one of its business areas is struggling – currently it is the North American healthcare division – others can pull it out of the mire.

However, companies are finding things tougher, with more going bust than at any time in the recent past; those keeping heads above water are cutting spending as much as possible.

Several observers are therefore getting more nervous about Sage. "We are nervous that the recent stream of newsflow regarding companies going into administration is likely to deteriorate at a time when the group's markets have become increasingly competitive, say those at Killick Capital. Cautious hold.

Morgan Sindall

Our view: Hold

Share price: 569.5p (+9.5p)

Morgan Sindall builds and sells homes, and along with the other UK housebuilders, some of which have lost more than 90 per cent of their value in the last 12 months, its stock has come under pressure.

Investors who have held the shares, which have fallen more than 66 per cent during the last year, will be kicking themselves. However, with the housebuilding and selling business making up just 2.5 per cent of the company, maybe the market has overreacted to the economic downturn in this case.

The executive chairman, John Morgan, certainly thinks so, pointing out that the company posted record interim results yesterday, showing that pre-tax profits were up 13 per cent. The company is on track to hit its own full-year projections, and has a solid £4.2bn-worth of orders on the books. Most of the group's revenues come from infrastructure and social housing.

Moreover, the company is undervalued in its sector. Watchers at Dresdner Kleinwort may have dramatically cut Morgan Sindall's target price to 581p from 1741p, blaming a softer outlook. At those levels, however, the stock is a steal, say analysts at Cazenove. "At 560p Morgan Sindall trades on a full year [estimated] 2009 price earnings ratio of 5.8 times and offers a yield of 7.1 per cent. We continue to believe that the current rating does not reflect the underlying strength of the business, the group currently trades at a 33 per cent discount to the sector and we retain our outperform recommendation."

Mr Morgan says that a severe cut in public spending, and the collapse of its office fit-out business, are his continued concerns, but that there is no evidence yet of uncomfortable slowdowns in either market.

Perhaps another concern should be the market's perception of the company, which has dragged the stock down, despite the relatively robust nature of most of the group's markets. Hold.

888 Holdings

Our view: Hold

Share price: 152.25p (-1.5p)

As we seemingly go headlong into recession, the very first example of belt-tightening you might expect to see would be consumers cutting what they spend on gambling. After all, with worries about paying the mortgage, even a small flutter might seem like an extravagance too far.

Well, apparently not, if 888 Holdings is anything to go by. The online gambling group, which in the past few months has started to sign up other gaming companies to use its technology, reported impressive first-half numbers yesterday, showing a jump of 36 per cent in profits.

People stay at home during a downturn, says the chief executive, Gigi Levy, and as such they are likely to spend more time online. Yes, a financial meltdown in which people cannot afford to eat would ruin 888's numbers, but if we manage to avoid that then all should be fine, so the theory goes.

Experts at Evolution expect the stock to improve, and increased its target price to 192p yesterday. However, there is a suggestion from some that the shares are approaching their full valuation. "With the shares now back at our 155p target price and trading at 18.4 times full year [estimated] 2008 earnings we are maintaining our target price and 'hold' recommendation," say watchers at Daniel Stewart. Hold.