Thursday tips round-up: Home Retail, Drax, Carillion
Home Retail Group, the owner of Argos and Homebase, is well placed to benefit from a sustained upturn in consumer spending. When this comes, it represents a safe pair of retail hands in the long-term. The valuation remains a concern, but given that Mervyn King, Governor of the Bank of England, is beginning to see signs of recovery, the Independent will hold, at least for the moment.
However, the Times thinks there can be few retailers as exposed as HRG to lengthy sterling weakness — it lacks the foreign-denominated earnings of, say, Kingfisher or the well-cushioned margins of a fashion retailer. With HRG’s shares at 17 times next year’s earnings, there are cheaper ways to bet on recovery. Pass.
The fact that Drax shares are pretty cheap, trading on a 2010 price earnings ratio of 6.2 times, is rather compelling. The company's trading update yesterday conceded that trading conditions remain tough. Indeed, the Independent would be nervous about the performance of the stock in the next 12 months, but investors cannot ignore such a juicy yield. Buy.
The Telegraph’s Questor believes that the market has got the valuation of Carillion's business wrong. The earnings multiples for the next two years fall to 7.5 then 7.3 based on current forecasts. This is a silly valuation for a growing and profitable business. Now is a great time to buy before the market wakes up to the Carillion story – and you can lock in a decent yield as well. Buy.
Publishing group Pearson raised it full-year forecast this week after a strong nine-month performance, especially in its US education business. Upgrades to consensus forecasts are likely, probably by about 4pc, and so the stance on the shares remains buy, says the Telegraph.
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