The Investment Column: Sentiment rather than fundamentals weigh on Prudential
Reed Elsevier; Unilever
Friday 01 August 2008
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.
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.
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.
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