Investment Column: Qinetic is not cheap, but is a solid buy

French Connection Group; De La Rue

Our view: Buy

Share price: 165p (-9.5p)

Defence companies are in vogue, and while some get squeamish about the sector, for investors interested in protecting the value of their portfolios companies like Qinetiq Group should be considered a solid buy.

The group issued a stellar set of interim results yesterday, saying underlying first-half profits were up 22.1 per cent and that full-year expectations were on track. There is a lot going right for the company at present: the fastest growing area of the business is its North American arm, which is benefiting from making acquisitions in the growing intelligence sector. The fact is defence spending is unlikely to be cut dramatically in future months, and, if it is, money is not expected to be withdrawn from areas such as intelligence operations, and protective devices, like robotics, in which the company is the market leader.

All that means investors should take a good long look at Qinetiq. According to experts at JP Morgan, however, it could already be too late: "We find [the] valuation too rich for earnings per share (EPS), compound annual growth rate and return on invested capital that are merely in line with defence peers at 9.7 times calendarised 2009 adjusted EPS... we await a better entry point and tangible signs of progress on commercialising its various ventures." Other doubters point out that the group trades at a premium to the likes of BAe Systems.

This is perfectly fair and solid advice, and does apply to those looking to distinguish between defence stocks. We would argue that the sector's defensive nature in the current market justifies buying even those, like Qinetiq, that might be a bit pricey. The stock was off 5.4 per cent yesterday as buyers took profits, making it that bit more enticing.

Qinetiq's shares are in positive territory over the past 12 months, and that should tell investors, who may have been burnt elsewhere, that the stock is fundamentally safe. It is not cheap, but there has to be a price to pay for security in these markets. Buy.

French Connection Group

Our view: Sell

Share price: 37p (-4.25p)

There are one or two things you can pick out of French Connection's trading update, to build an argument for buying the stock. The fashion retailer and wholesaler said sales in its ladies-wear range have marginally increased in its UK and European stores and that it has £20m net cash on its balance sheet. Sadly, that is about it. The retail sector has taken a real kicking in this column in recent weeks and unfortunately there is little about French Connection to suggest the group deserves better treatment. The high street is in an awful bind, with French Connection the latest in the sector to announce: "It has been widely reported that the retail environments in both the UK and North America have deteriorated markedly since the banking crisis hit the headlines in September. We too have seen the impact of this in our sales figures with the strong performance in UK retail sales in the first weeks of the new season replaced by softer results more recently."

There is nothing to suggest French Connection will do a Woolworths; the group is in far better shape than that, but things are tough and that should encourage investors to stay well clear.

French Connection's chief executive, Roy Naismith, reckons the group is set to do well when the market turns, but in the same breath says he is gloomy about the economy's prospects for the foreseeable future. House broker Numis says the market ascribes no value to French Connection's recovery, which is probably true, but it is because the market does not expect a recovery any time soon. Sell.

De La Rue

Our view: Buy

Share price: 820p (-21.5p)

When there are no risks in a business, especially in these worrying times, investors should pile in. Leo Quinn, De La Rue's outgoing chief executive, struggles to think of any facing the group that prints banknotes and designs security for ID cards and passports.

Obviously, there are risks, but we would agree they are few and far between. Investors who have held the shares over the last 12 months have seen their investment grow. Coupled with the fact the dividend has effectively been doubled, and that over the last four years De La Rue has embarked on several share buy-backs and special dividends, there is a compelling case for the shares.

Yesterday's interim results showed a £7m hike in pre-tax profits to £47.2m. Even if all you can say about the group is it is a safe haven, that should be enough to convince punters to buy the shares in these woeful markets.