Travis Perkins still looking solid

Good timing for Taylor Nelson's US move; Lack of growth makes John Wood too expensive

Travis Perkins, the chain of builders' merchants, continues to show remarkable operational and share price progress. The company's success is based on a continuous programme of acquisitions, sticking to the UK market that it knows so well and catering to the great British passion for home improvement.

Not only is our housing stock old and of poor quality (requiring constant repair and maintenance), but we are also a nation obsessed with keeping up with the Joneses.

Yesterday the company reported an 18 per cent increase in profits and turnover. Of that, organic sales growth was 4 per cent. The company serves mainly the "jobbing builder", making the average transaction volume relatively small at £64, but the business model is reliant on passing a lot of customers quickly through the sites.

Travis Perkins is not, therefore, particularly interested in serving the novice DIY enthusiast, who may tie up till staff with questions and demand for help, frustrating builders who need to get on with their jobs.

The company - which is among the top three players in an industry that is still fragmented - needs to keep gobbling up independents to sustain growth. That means delivering 50 to 60 purchases a year of single-site operations or regional businesses. With some 2,000 such businesses still out there (making up about 45 per cent of the £11bn sector), that should not be a problem. On top of that, there is also the possibility of developing new sites on disused industrial land. And, should the company find a larger acquisition opportunity, with its low debt (its gearing is 27 per cent), it can afford to pay up to £700m without issuing shares. Buying power increases with scale.

Travis Perkins shares have performed strongly over the past three years, and two years ago we tipped it as one to tuck away. In the past 12 months, the stock has risen from 921p to close yesterday at 1,360p. That puts the shares on a forward multiple of 12, which is not expensive and at discount to rival Wolseley. Still worth holding.

Good timing for Taylor Nelson's US move

Taylor Nelson Sofres, the market research and polling group, seems to be ticking all the right boxes, with annual results published yesterday that show both turnover and operating profits up more than 30 per cent in 2003.

Sales rose to £805.2m while operating profits were £80.8m. What lies behind these big rises, however, is last year's transforming deal to buy NFO, its US rival, for $425m (£231m). Strip out NFO's contribution and top line growth falls to 2 per cent, according to Mike Kirkham, the TNS chief executive.

This lower growth rate more accurately reflects the fact that market research is the kind of expenditure that cost-conscious companies have been happy to cut in recent years.

However, the NFO deal has come just at the right time for TNS. Market research tends to be highly cyclical so more exposure to the world's biggest economy is a positive, especially as the US starts to recover.

Cost savings this year from the deal, at £15m, are double the anticipated level while NFO is also expected to help improve TNS's operating margins from 10 per cent to up to 11 per cent. Another pleasing aspect of NFO is its cash generation. TNS had net debt of £417m after buying NFO last summer. That is already down to £367m.

The way TNS goes about its research is also becoming more efficient, with up to 2 million US consumers available to consult online, and more internet-based research planned for Europe.

At a price-earnings multiple of 16 times this year's earnings and 14 times for 2005, the company is attractively priced. Buy.

Lack of growth makes John Wood too expensive

John Wood, the oil services group controlled by the Woods, one of Scotland's wealthiest clans, was floated in 2002 on a valuation reflecting its history of double-digit percentage earnings growth. But in 2003, there was no growth at all, and there is little chance of much this year either. The stock languishes a third below its float price.

Because Wood reports its results in dollars, UK investors buying the shares in sterling are now getting much less for their money, so the share price fall to date may not even fully reflect the scale of the disappointment.

Because yesterday's annual results were no worse than outlined in December's profit warning, some analysts revised their bearish stance. One problem for Wood has been that oil giants scaled back plans to drill in the Gulf of Mexico and other deep water sites, in favour of easier, cheaper pickings in Russia. That means less lucrative work helping to design rigs. The numbers of deep water projects under way will increase year on year from here. The second problem is that maintenance of gas turbines for US power generators has suffered because of the generators' dire financial straits. It might take into next year for that to start correcting.

We have never recommended Wood shares, fearing pressures on margins, and at 138.5p, they still look pricey now.