The Guide to Investing in Stocks and Shares

Eavesdropper's Dogged Investment

By Alan Watson - A Shareworld Contributor

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January 2011 - Issue 5

Contents at a Glance

1. Market Comment & Strategy
2. Share of the Month:Thomas Cook
3. Share of the Moment:LEGAL & GENERAL
4. Sniffing Around:ECKOH, PROMETHEAN WORLD
5. Penny Spec:SIRIUS, VANE MINERALS
6. Straight from the Kennel:First Group

Market Comment & Strategy

What are we faced with in 2011?

There are certainly a number of negative scenarios which could hit stock markets. There's the Far East which has been driving business for some time. The spectre of Inflation has raised its ugly head in the region which could slow down business activity. After all, no one can maintain economic growth of 10% forever. The European Union currently looks less of a union after bailing out some of its members. This brings to mind the UK's Coalition Government which could be looking less of a coalition in due course. And there are possibilities of hostilities in Korea, Iran and Pakistan. We haven't even mentioned the prospects of further falls in the UK housing market. The major advantage that the UK Stock Market has is that the bulk of the companies quoted there are involved in overseas activities in places with economies which remain strong. Moreover Quantitative easing is still there providing liquidity to keep the wheels turning. Shares are being bought because of their attractive dividend yields -and because they are not over valued. So morale in the UK seems to be holding up. Christmas was reasonably jolly and according to a survey, while most families intended to cut their expenditure on holidays, they were still determined to have a holiday. It gives you the feeling that 2011 might not turn out to be so bad after all.

Share of the Month

Thomas Cook

The share price has been subdued by the Office of Fair Trading's decision to look into the proposed merger of Thomas Cook's travel agent and foreign exchange businesses with the Co-operative Group. A judgement is expected within six weeks. The shares, which have been trading sideways around the 190p level since last July, are currenty showing signs of picking up.

The merger is important. TCG has been having a relatively difficult time in the face of a consumer downturn. It has refocused on medium haul all inclusive business, cutting back on short haul, self catering and lower star holidays. This, combined with the Co-perative Group's business, could in due course lead to higher margins. In recent months TCL has been rationalising its operations. In anticipation of lower demand in 2011 it has reduced its capacity in aircraft by perhaps 25% and it has also been hedging its fuel. However, the year to 30/9/10 was "challenging". Winter capacity cuts and what the company referred to as a "softer" summer trading environment resulted in a 4% decline in revenues from £9.27bn to £8.89bn. Underlying operational profit fell 5% from £451.1m to £391.4 and pre-tax profits fell 6.1% from £294.9m to £277.0m. There was some comfort from a lower than expected rise in net debt from £675.3m to £803.4m and that there was an annual dividend of 7p, albeit reduced from 10.25p.

Amongst the 12 research houses which cover TCG there are no outright sellers and 7 of them advocate buying the shares. Assuming that merger goes through, the buyers' consensus is that pre-tax profits in the year to 30/9/11 could be set to emerge at around £300m with earnings per share of perhaps 25p, a prospective PER of 8. They anticipate further growth in the year to 30/9/12 to pre-tax profits of £340m implying that the shares could be trading on a forward PER of 7.3 and a dividend yield of 5.7%

Although the shares look cheap, a purchase of the shares at this point is a bet that the merger will go through as planned. It presupposes that TCG and the Co-operative Group will be given the go-ahead to merge as planned. On the downside, there may be a refusal of permission to merge or restrictions imposed which make the merged group less attractive to investors. We believe that the merger looks likely to go ahead, based simply on the fact that there is little evidence that it should not. Judging by the relative strength of TCG's share price in recent weeks, a fair number of investors agree. Consider as a Buy.

Price: 204.6p Bid 204.5p Offer 204.7p; Sector: Travel and Leisure ; Market Capitalisation £1.76bn; Epic TCG

Share of the Moment

LEGAL & GENERAL

The group, which was founded in 1836, operates as a financial services company. It offers an extensive range of insurance cover and products including life assurance, buildings and contents, travel, long term and general insurance products. It also offers financial planning, savings and investment products. Based in the UK, it also operates in the US, the Netherlands and France.

The third quarter results were reasonably encouraging. Cash generation at 30/9/10 was £526m compared with £461m in the same period of 2009 and assets under management increased from £384m to £426m. New Funds during the period rose by 13% to £24,329m to £27,572m. Elsewhere, International Business rose by 21% to £111m. Overall business was up by around 27%.

Analysts expect that pre-tax will be modestly better than those of those of 2009. They anticipate pre-tax profits of £1.15bn compared with £1.07bn previously. Given that, the dividend is likely to emerge at 4.8p unchanged from 2009.

While the outlook for 2011 is somewhat unclear there is no denying that there are signs of recovery in L&G's performance. The shares are currently trading on a prospective PER of 7.9 and a dividend yield of 4.2% based on the forecast figures for 2010 and look good value. The results for the year ending 31/12/10 are due to be announced on 23/3/11. Consider the shares as a buy.

Price 110.1p Bid 110.1p Offer 110.2p; Sector: Life Assurance; Market Cap: £6.4bn; EPIC LGEN
(Legal & General is a constituent of the FTSE 100 INDEX)

Sniffing Around

ECKOH

Eckoh is an interesting smaller company. It is the UK's leading developer of speech recognition solutions for customer contact centres and describes itself as "the specialist of choice for organisations looking to maximise the efficiency of their contact centre operations." The technology enables routine enquiries, transactions or payments to be processed without the need for the consumer to talk to an agent. For many companies this reduces operational costs, while freeing up agents to deal with more complex enquiries.

The success of the technology has made Eckoh the largest developer of such hosted services in the UK. Its secure and robust infrastructure has the scalability to handle over 650,000 calls an hour and up to 8,000 calls simultaneously. Typical applications include: Intelligent call routing, Bill and Account payment, Product purchase, Subscription and Membership services as well as Ticket booking and Service outage notifications.

In the six months to 30/9/10 pre-tax profits rose from £125,000 to £374,000. At the end of the period cash balances amounted to £5.0m compared with £3.3m at the beginning of the year. During the period there were two new contracts and existing contracts with Ideal Shopping Direct and Enterprise Rent-a-Car were renewed. Elsewhere, Interactive Voice Response, an Eckoh subsidiary, was sold to Telecom Express.

It is also worth mentioning that Eckoh received the highest level accreditation for compliance with the Payment Card Industry Data Security Standards. It is likely that this accolade resulted, towards the end of December 2010, in the award of a three-year contract from Whitbread to provide speech recognition services to Premier Inns. Whitbread is so far Eckoh's largest customer.

Eckoh is busy and well financed and continues to enhance its reputation with an excellent service product. The outlook for the full year ending 31/3/11 is for pre-tax profits of around £1m and we anticipate the payment of a first dividend.

Further growth is expected in the year ending 31/3/12. If, say, pre-tax profits of £1.5m are achieved, the shares could be trading currently on a forward PER of 10, which is undemanding. Consider as a buy.

Price 7p Bid 6.75p Offer 7.25p; Sector: Support Services; Market Cap: £14.0m; EPIC ECK.
(Echoh is quoted on the higher risk Alternative Investment Market. See Important Notes on last page.)

PROMETHEAN WORLD

Fully quoted on the London market, PRW is a world leader in the rapidly growing global market for interactive learning technology. Its 'ActiveClassroom' product is an industry-leading comprehensive classroom solution.

The company was floated on the London Market on 17/3/2010 at around 200p. At the end of April it published an Interim Management Statement which revealed first quarter revenues up 49% to £53.9m and reported that the positive trend was continuing. Shareholders were assured that 2010's earnings were set to emerge at the higher end of expectations.

The bad news which emerged mid 2010 was that US customers were savagely cutting back on orders. This ultimately pushed the share price to below 50p, some 70% below the issue price. The fall in the share price made it the worst performing new issue of the year.

There are signs that the company is recovering and the share price has moved off the bottom to the current level. The Chairman remains optimistic that the figures for the year to 31/3/10 will not disappoint. Three research houses have recently published research on the PRW. The consensus is that pre-tax profits could emerge at around £23m. This implies that the shares could be trading on a prospective PER of 8.6 and a yield of 3.6%. Consider as a speculative buy..

Price 69p Bid 69p Offer 69.25p; Sector: Technology Hardware; Market Cap: £138m; EPIC PRW

Penny Spec - Progress Report

SIRIUS

  Tipped at 3.5p in the November 2010 issue of Dogged, the shares currently stand at18.75p. The surge in the price has in part been driven by investors' increased understanding of the importance of Potash in improving food production and the news that the company has acquired York Potash, which owns mineral rights in Yorkshire. The belief is that York could become a major of producer of potash. The group is already in the early stages of assessing the potential. If the news is positive in due course the share price could rise substantially from current levels.

The shares remain an attractive speculation but there may be some profit-taking, given the sevenfold rise in the share price. We think that Sirius is a situation to be buying rather than selling. Our feeling is that we are seeing the first stages of what could prove to be a period of considerable growth. Strong Buy.

Price 18.75p Bid 18.5p Offer 19p; Sector: Mining ; Market Cap: £124.4m; EPIC SXX

VANE MINERALS

The company is a well funded developer of uranium and copper projects in North America. Utilizing a team made up of leading industry professionals it is developing new uranium resources in North America both independently and through Joint ventures. With projects in some of the most important uranium districts in the US the Company aims to develop highly efficient mines with a low environmental impact It was also tipped in the November Edition at 2.6p. The share price currently standing at 3.5p. Strong Buy.

Price 3.5p Bid 3.25p Offer 3.75p; Sector: Mining ; Market Cap: £10.4m; EPIC VML  

Straight from the Kennel

First Group

I was watching telly the other day. They were interviewing a British footballer who plays for one of the major league Italian teams. Earning a fortune, of course.
The interviewer asked how it felt being far from home, away from family and friends and not understanding a word of the local language and having no intention of learning it.
The lad thoughtfully rubbed his immaculately stubbled head, pulled at the £20,000 diamond stud in his ear and answered: "It's like, well, living in a foreign country."

Although it was badly put, you knew just what he meant. And it got me thinking of travel abroad. Investors are currently worried by the possible effects of the economic downturn on the travel trade. However, the editor of this tip sheet has indicated on page 1 that , while the public are likely to spend less on holidays, they still intend to have a holiday, despite pressure on earnings. Travel companies' share prices are currently discounting the worst case scenario where everyone stays at home. However, it may not work out as bad as that, which means that share prices in the travel sector could be cheap at current levels.

You can follow the editor's suggestion to buy Thomas Cook but remember, a dog is an investor's best friend, and this dog prefers First Group. You can, of course, buy both. FirstGroup has just issued a third quarter statement covering the period 1 October to 31 December 2010. In it the management say that trading was in line with their expectations and the company remains on course to achieve earnings and cash targets for the current year. This does not mean that conditions are easy - the recent dreadful weather over the festive season didn't help - but it's encouraging. Analysts are forecasting pre-tax profits of £290m with earnings per share of 22.2p,For the year to 30/10/11 a prospective PER of 9.6 and Yield of 5.6%, which looks cheap. I think that the shares could be going places. Buy.

Price 399.75p Bid 399.6p Offer 399.9p; Sector:Travel & Leisure; Market Cap: £1.923bn; EPIC FGP