Investors have reasons to be cheerful
Jun 29 2009 by Andrew Miller, The Journal
BAE Systems – BAE management is said to be confused by recent share price weakness, but it is responding in an appropriate manner by focusing on delivering growth in earnings and dividends.
Current expectations are for two years of growth, but longer-term forecasts show growth tailing off and earnings stabilising. So management targeting five years’ growth is better than the market expects. There is scope for more positive surprises from new order wins (US military vehicles) and in Middle East export orders being sought.
On current estimates, the shares are cheap and provide a good yield. We think BAE’s defensiveness is perceived as being less attractive to investors when high beta stocks are buoyed by hopes of an economic recovery. This should be factored into weightings for those investors bullish on an economic recovery.
For now, the confirmation of its long-term growth targets and attractive valuation, especially for income, means we hold a positive view and are buyers of the stock.
BMW – We are moving BMW to a buy. The recession hitting 2009 volumes is known. BMW is not a major beneficiary of European government incentive schemes, so it should not be seeing sales pulled forward.
Hence its volumes should pick up in 2010, assuming a sustained global economic recovery materialises. It may see an earlier improvement in its US business (20% of volumes) given the maturity of the recession in the region. Its new model programme picks up pace from 2010, which should aid sales. Investment into improving the fuel efficiency of new models, while maintaining BMW’s performance characteristics, should support their attractiveness. It has an ongoing profit improvement programme which will provide some earnings momentum. We have estimated fair value at €31, (£26) based on its long-term earnings potential. The shares are expected to be volatile and driven more by monthly sales statistics. Hence, the shares carry some risk. However, we think that BMW is attractive for investors looking for exposure to recovering economies via auto markets from 2010.
Travis Perkins – Travis Perkins is a pure UK play, and it derives 85% of group revenues through residential markets.
While it could be argued the group lacks diversity both geographically and by division when compared to peers Wolseley and SIG, we think there is a good possibility that UK residential housing will recover ahead of both the US, Europe and almost certainly before non-residential. Both US and UK housing starts have begun to show some signs of stabilisation but there remains about 10 months of unsold inventory in the US, so we think recovery there may take a bit longer, while Europe and non-residential tend to be late cyclicals.
In our view, Travis Perkins has been the most proactive in its cost-cutting initiatives relative to rivals.
We think a premium is justified by the group’s strong management team, its leading position in both the DIY and building merchants markets, its superior margins and consequently its ability to discourage price competition.
Andrew Miller is regional office head of Barclays Wealth
