Investment Column: Stay on board as Stagecoach keeps rolling

Carillion; Kesa

Our view: Hold

Share price: 212p (-3p)

While Stagecoach shares have had their ups and downs recently, the trend has been positive and after a spending review-related wobble they are firmly back on track. Yesterday, the company was making headlines after saying the icy roads had driven motorists on to its buses and trains. But there was much more to a balmy set of numbers than a resilient performance during the cold snap. First-half profits were up by 43 per cent to £108.7m with positives in rail, the US bus division and the UK bus division.

Stagecoach may not be much-loved by commuters (whatever its claims) but evidence of its financial chutzpah can be seen in its re-entry into the London bus market: it first sold the East London Bus Group to Aussie bank Macquarie for £263m, only to buy it back off administrators in October for £52.8m. And things are going well, according to the company yesterday. What's more, the management showed its confidence by increasing the dividend by 10 per cent to 2.2p.

So all is rosy. However, there are headwinds. The company has benefited from cheaper fuel prices this time round but they are due to go up. And up. The decrease in spending by the Department of Transport will, one way or another, force fares higher at a time when consumers are not flush with cash. The financial position is at least strong: net debt was £313.4m at the end of September 2010 (from £343m the year before), including the London bus deal. On just under 10 times full-year earnings the shares are fairly priced, yielding a respectable but not overly generous 3.3 per cent.

Management is confident, and hopeful of securing longer-term franchises for the rail operations while the US business is powering ahead. We were holders at 190.8p and, while there's an argument for taking profits, we think that those who hang on in there will be rewarded. Hold.

Carillion

Our view: Buy

Share price: 370.7p (+15.9p)

The economy remains firmly lodged in the doldrums and the UK construction sector seems to be heading for another slowdown, with the Government's cost-cutting drive clouding the picture. On the face of it, you would think that this backdrop would be hard on Carillion, the building and support services group which issued a trading update yesterday. But think again, for the company released what even the most bearish investor must concede was a reassuring statement.

The business continues to perform well, with chief executive John McDonough saying Carillion could exceed hopes of a 4 per cent rise in earnings this year. The strength is down to a variety of factors, but the ones that stand out for us are Carillion's strong Middle Eastern business and its decision back in May to reduce the size of its UK construction business by one-third over the next three years.

The combination of international exposure, well-timed strategic moves and a robust balance sheet have left this company in a strong position. And trading on a very modest-looking multiple of just under 9 times forecast earnings for this year and the next, the shares don't look bad from a valuation standpoint either. That being the case, we say buy.

Kesa

Our view: Hold

Share price: 169.6p (-2.3p)

It was a tale of two countries over the past six months at Kesa Electricals, which owns Comet in the UK and Darty in France. The electrical retailer's biggest operation, Darty France, delivered the goods with retail profits up by 16.3 per cent to €59.8m for the six months to 31 October, driven by booming online revenues and sales up by 2.2 per cent at stores open at least a year.

However, in the UK, Comet posted widening losses of €6.4m, which it partly attributed to its extensive investment in store refits. The 249-store chain benefited from sales of TVs during the World Cup in the first quarter, but Kesa faced harder going in the second. Like-for-like sales fell by 3.7 per cent at the chain.

Despite the retailer's focus on higher-margin accessories, small domestic appliances and a new web platform, we don't think the consumer environment in 2011 will be any easier for Comet. Furthermore, Kesa's shares now trade on a relatively pricey earnings multiple of 13.9 for next year, following a strong run since a low of 99p in June. While Knight Vinke, the activist investor, has grabbed an 8 per cent share in Kesa recently and is obviously a fan, we think Comet's turnaround in the UK could take time. But hold on.