Friday Tips round-up. 08.July.2011

LONDON.  A consortium made a tentative approach for car dealer Lookers at 80p a share, sought due diligence, reckoned the company had a couple of issues that made it worth less than that and offered 70p, we learnt yesterday from Lookers. The company rejected this, and the consortium said it would not bid. The world moves on, and Lookers shares fell 3¾p to 54p yesterday as the consortium’s low-ball offer was revealed. The company is actually not doing that badly in today’s trading environment. Lookers shares are on about eight times this year’s earnings, but with profits looking flattish for the next couple of years at least, there seems no reason to chase, suggests the Times.

Worried about defence cuts? No problem. At least that’s the message from Babcock International. In fact, the group says that countries such as Britain and America, which are laden with vast amounts of public debt, are increasingly looking to drive efficiencies by outsourcing defence work to companies such as Babcock, which is perhaps best known for maintaining the Royal Navy’s submarine fleet. We’ve always been slightly sceptical about the outsourcing story. All too often its trotted out as a panacea when people, often in the public sector, need to save money. The results are not always happy.

At current levels, the stock is valued at nearly 12 times full-year earnings, falling to 10.5 times next year. The group has historically traded at about 14 times, which suggests that there is room for a little growth. But times are tougher now. It’s a tough call. However, on balance, in the short to medium term we don’t see much to drive the stock forward. Take profits. Sell, recommends the Independent.

The internet is not getting any safer. The rise of “cloud computing”, where data is stored remotely rather than on a company’s database, offers its own security concerns, while the proliferation of tablet computers offers increasing access to such data. This is good news for NCC, which provides companies with internet security solutions — indeed, Rob Cotton, the chief executive, describes the coming of cloud computing as a “honey-pot” for his business. Mr Cotton says his market is an “arms race” between his trained staff and cyber-criminals. The woes of Sony’s PlayStation platform in April will have concentrated minds at other corporates. The strong prospects for NCC have been reflected in the share price performance, up 5p yesterday to 652½p. They are on a hefty forward multiple of 15.5 but should have further to go in due course, according to the Times.

The last time we looked at McBride, we decided to sell, reasoning that its stock was likely to be pressured by the combination of rising raw materials costs and the ongoing consumer squeeze, particularly in the UK. There was nothing in yesterday’s trading update to suggest that input prices had softened, nor was there much encouragement on the retail environment, which the group characterised as “weak”. This is hardly surprising, giving activity on the commodity markets and increasing signs of turmoil on the high street. We look forward to the release of its full-year results, which may well prove to be a catalyst for gains. But until then, we think the backdrop remains far too uncertain, according to the Independent, which recommends to sell.

The best policy as a retailer in a tough environment, if you have the financial strength to do so, is not to concentrate too hard on top line sales but to try to improve margins by cutting costs and underperforming lines. This is the strategy adopted by Kate Swann, chief executive of WH Smith, while moving further into travel locations such as airports and railway stations. The policy seems to be working. WH Smith’s trading statement yesterday showed like-for-like sales down a mere 4 per cent in the 18 weeks to the start of July, though gross margins improved by an unspecified amount. The company is highly cash-generative and is about 90 per cent through its £50 million share buyback programme announced in October. But the shares have had a good run, and there seems little point to buy into anywhere on Planet Retail at present, recommends the Times.

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