The Investment Column: Sentiment rather than fundamentals weigh on Prudential

Reed Elsevier; Unilever


Our view: Sell

Share price: 546p (+10p)

The Investment Column last looked at Prudential in April, when, convinced by the group's arguments that the Asian markets would continue to hold the share price steady, we said that investors should hold the stock.

Frankly, we were wrong. The group's share price has fallen from 674.5p since then as investors have become more fearful about the consequences of the consumer slowdown on the Asian markets, where the insurer does more than half its business. Yesterday, the group confirmed that fact and theory are not the same thing, however by announcing that first-half operating profits were up 8.3 per cent at £1.43bn. The main reason is a bumper six months in Asia, where the group is on track to double its 2005 new-business level a year earlier than planned.

Chief executive Mark Tucker reckons all this is partly the industry's own fault as accounting procedures have been made unduly complicated. Look at the banking sector, he argues, where the share prices of banks like Royal Bank of Scotland and HBOS, which do most of their business in developed markets, have taken a hammering, while houses like Standard Chartered, which operates almost exclusively in emerging markets, have lost significantly less.

While those arguments may well be justified, they will come as little consolation to investors who held or bought in April. It is undoubtedly true that the Pru is undervalued and that ordinarily buyers would be crazy to ignore the group. Watchers at Keefe, Bruyette and Woods certainly say so, suggesting that "we believe there will be upside surprises here...At a price-to-market consistent fair value of 61 per cent (large cap peers 63 per cent), we do not see the stock as expensive."

The Pru does offer good value and continues going great guns, even in the choppy US market. However, unless the entire market improves dramatically in the next few months, it is difficult to predict any upward pressure on the share price. A good, well-run company in the right markets but unfortunately one that will not make money for investors in the short term. Sell.

Reed Elsevier

Our view: Buy

Share price: 576.5p (+32.5p)

The conventional wisdom is that investors should avoid media and publishing stocks at all costs in a downturn. As hard-up consumers spend less on newspapers, magazines and websites, so advertisers, who themselves are up against it anyway, spend less with publishers. Investors in specialist Anglo-Dutch publisher Reed Elsevier will be all too aware of this phenomenon in the last few months as the stock has fallen from 669p on 8 May.

However, those investors rushing for the exits should be aware that the group is in good shape, with the market reacting well to yesterday's first-half results. And anyway, says chief executive Sir Crispin Davies, being lumped in as a media stock is becoming somewhat tiresome: the group is in the process of selling off its trade press business and when that is done, will depend on advertising for just 5 per cent of revenues.

During the last decade Reed Elsevier has gone from publishing most of its material in print, to online, to now what Sir Crispin describes as an online workflow solution, which allows its professional clients to operate any number of procedures through an integrated package of products.

According to analysts, this move, as well as the increasing reliance on the emerging markets, has not yet been fully appreciated by investors. Those at UBS say that "we expect Reed Elsevier to recover its recent underperformance versus the sector, and see it as cheap on 11 to 12 times 2009 EPS for a stock delivering a defensive 12 to 14 per cent per annum EPS growth." Buy.

Unilever

Our view: Sell

Share price: 1388p (-122p)

Ice-cream sales make up about 15 per cent of Unilever's total turnover in Europe, which is a shame as the share price melted at about the same rate yesterday when the group announced its numbers for the first half.

The stock closed the day down 8 per cent after the consumer goods maker came under pressure from higher input costs and a strong euro.

On the face of things the numbers looked pretty impressive, with underlying sales growth up 7 per cent and turnover increasing by 6 per cent to €10.37bn (£8.2bn) . All good so far, but the market was much more concerned by negative volume growth, which led analysts at Panmure Gordon to cut the group's target price from 1725p top 1525p. Even achieving this level will be something of a mission for the group in the next 12 months. Very few expect the consumer market to be recovering anytime soon, and even though Unilever is doing well in Asia, sentiment alone is enough to drag the stock down.

If investors want exposure to the sector, Unilever would not be a bad bet. Trading at 14.3 times 2008 earnings, it is cheaper than rivals like Nestle and Danone, but on a fundamental basis it is likely that investors will see losses on the entire sector. Sell.

Start your day with The Independent, sign up for daily news emails
News
ebookA unique anthology of reporting and analysis of a crucial period of history
News
peopleMathematician John Nash inspired the film Beautiful Mind
News
Richard Blair is concerned the trenches are falling into disrepair
newsGeorge Orwell's son wants to save war site that inspired book
Life and Style
Audrey Hepburn with Hubert De Givenchy, whose well-cut black tuxedo is a 'timeless look'
fashionIt may be a paradox, but the industry loves it
Arts and Entertainment
The pair in their heyday in 1967
music
Life and Style
fashionFrom bathing dresses in the twenties to modern bikinis
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Abuse - and the hell that came afterwards

Abuse - and the hell that follows

James Rhodes on the extraordinary legal battle to publish his memoir
Why we need a 'tranquility map' of England, according to campaigners

It's oh so quiet!

The case for a 'tranquility map' of England
'Timeless fashion': It may be a paradox, but the industry loves it

'Timeless fashion'

It may be a paradox, but the industry loves it
If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

Could have done with Osama bin Laden staying alive?

Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
New exhibition celebrates the evolution of swimwear

Evolution of swimwear

From bathing dresses in the twenties to modern bikinis
Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine