The Investment Column: Wood is a solid stock but returns will not be high

BATM Advanced Communications; Judges Capital
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The Independent Online

Our view: Hold

Share view: 435p (-11.75)

It is difficult to argue that Wood Group, the FTSE 100 oil and gas engineering group, has not a good year. And with its shares up 32 per cent in the last 12 months, investors have also done pretty nicely out of owning the stock. Indeed, there was yet further cheer yesterday when the group announced that first-half pre-tax profits were up by more than a decent 46 per cent, to $181.3m.

That said, investors would be wise to avoid the stock now. Despite the good news, the stock underperformed the rest of the FTSE 100 yesterday, falling by 2.6 per cent on the day.

The truth is that the longer the wider financial crisis continues, so investors have increasingly gravitated to those groups, such as Wood, that have benefited from a spike in oil prices. The longer the downturn continues, the more expensive the stock gets, and the less room the shares have to grow.

The chief executive, Allister Langlands, says that the group's financial performance is linked to the overall demand for its services, rather than the price of oil, and it is true that the group feels itself to be in excellent shape: it has added 10 per cent to its workforce in the last year.

Moreover, the analysts like the company. Previewing yesterday's numbers, those at Oriel said that clients should buy at 399p after a recent drop in the share price, which the watchers said had been overdone. That, however, was before a spike in the stock that took it up to 446.75p before the announcement. The group trades on a par in valuation terms with its peers, and it is difficult to make a case for saying the stock will provide massive returns in the next six months.

Wood is a very good company, but buyers looking for impressive returns would probably be better looking elsewhere. Hold.

BATM Advanced Communications

Our view: Buy

Share view: 56.25p (+3p)

History does not really bother Zvi Marom, chief executive of the broadband and telecoms systems group BATM, which yesterday published its interim results showing a 161 per cent, yes a 161 per cent, increase in pre-tax profits. While the rest of the market was cooing over the numbers, Mr Marom claimed that that was the past, and he was busy getting on with running the business.

BATM was one of the darlings of the era and so investors may be forgiven for thinking they recognise the group. Mr Marom claims he felt like a figure in Monty Python in the early part of the decade when, he claims, people did not listen to his protestations that the market was a bubble.

The company's shares have grown by more than 80 per cent in the last year, and the experts concede that they have been hitherto too cautious on the group. Those at FinnCap say, "we first recommended BATM at 35p in February this year with a price target of 60p. Given these strong half- year earnings and developments into new geographical markets (eastern Europe) and new verticals (medical and security), we raise our 12-month price target from 60p to 80p, based on an increase in full-year EPS estimate from 3p to 4p."

In truth, BATM has beaten most analysts' expectation, and while there is a danger that the group is already fully valued, investors should be encouraged to take a punt. Yes, the company is exposed to the economic downturn, but it seems to be coping well enough at the moment.

Investors convinced by the sector will be interested to learn that the stock is cheap against the peer group. "At 56p, the stock trades at 11.9 times our 2008 earnings per share before amortisation of acquired intangibles. This represents a c50 per cent discount to ARM and a c30 per cent discount to Spirent," say those at Kaupthing. Buy.

Judges Capital

Our view: Cautious hold

Share view: 104p (+3.5p)

The recent history of the scientific instrument supplier Judges Capital is somewhat confusing from an investor's point of view. The shares have dropped by 25 per cent in the last three months, and on every occasion the stock has been hit, it is usually on news that the company is making more money.

The chief executive, David Cicurel, says that the current stock level is "disappointing". He argues that while the share are illiquid, they should not be trading on a price earnings ratio of 6.7 times when its rivals, most of which he admits are much bigger, trade onratios as high as 15 times.

The group issued its interim numbers yesterday, saying that pre-tax profits were £672,000, up from £190,000 last year. Mr Cicurel says that the market should be realistic enough to expect the second-half numbers not to be quite as impressive, but with what he claims is a healthy order book and a business that relies largely on government regulation for its safety equipment, investors may think the group is worth a punt.

However, with the market generally preferring larger rivals, investors may wish to avoid illiquid shares for the time being, especially as there is downward momentum in the stock. Cautious hold.