Investment Column: Cut-price Compass is well worth a punt

H&T Group; Greggs

Our view: Buy

Share price: 353p (+20.25p)

If a company has the contracts to feed a lot of large organisations, including some of the biggest in the public sector such as the British Army, there must be something of the resilient about it.

On one hand, with more potential clients moving to outsource non-core operations, such as the provision of food for employees, Compass is a natural winner. There were "crosses" in yesterday's interim results however, with the chief executive Richard Cousins conceding that the group's biggest revenue contributor, its corporate business, was suffering somewhat as clients lay off staff.

Nevertheless, the group is a solid investment and announced that operating profits were up 41 per cent, taking positive currency movements into account. For investors, there was a very juicy 10 per cent increase in the interim dividend.

Surprisingly, Compass is also something of a bargain at these levels. Analysts at Credit Suisse reckon the stock is cheap, pointing out that "Compass trades on a September 2009 price-earnings ratio (p/e) of 11.8 times... At 410p [the watchers' target price] Compass would trade on a September 2009 enterprise value to Ebitda of eight times and a p/e of 14.5 times, which would be in line with [rival] Sodexo's p/e at our target price."

Mr Cousins refuses to be drawn into a debate about why Compass trades at discount, saying that somebody cleverer should be asked.

The cleverer person might well point out that Compass has a rather dodgy debt-fuelled past, but we now see very few reasons not to buy the shares. The group says it is expecting a strong second half and we would tend to agree with the experts at Killik & Co who argue that: "Compass is the market leader in an industry with significant growth potential and we believe the shares should be a core holding in an equity portfolio." Buy.

H&T Group

Our view: Buy

Share price: 198.5p (+18.5p)

It is said that pawnbrokers do rather well in a recession. As people lose their jobs, the family's jewellery gets pawned to help meet the bills, so the conventional wisdom goes.

H&T, the UK's biggest pawnbroker, argues that in fact this a myth and puts its growth, which, according to yesterday's trading update, is ahead of all expectations, down to the increasing price of gold and the opening of more stores. The type of customer remains those that find it difficult to get credit elsewhere, they add, saying that some clients view the group as a bank.

The stock was up 10.3 per cent yesterday, which will no doubt have been met with a sigh of relief from investors. Before the update, the stock had fallen nearly 10 per cent in the past month, despite the company putting out a stream of good news for some time. That might suggest that the stock is reaching fair value, and several analysts had a price target approaching 200p before yesterday's news.

We are always a little wary about recommending shares that appear to be fully valued, but at the same time we do expect the watchers to be reassessing their figures. Indeed, those at house broker Numis reckon the stock will reach 340p: "H&T has underperformed the FTSE All Share by about 20 per cent over the last month and we would see this weakness as an excellent opportunity for new investors."

We rather suspect this is a touch ambitious, but do agree that the share price will grow. The group also trades at a huge 62 per cent discount to its main rival, according to watchers at Daniel Stewart, and with the price of gold continuing to head north, we expect investors to get a healthy return if they buy today. Buy.

Greggs

Our view: Hold

Share price: 3593p (+43p)

Some of the best investment advice is, only bet on something you understand. One advantage of Greggs, the high street baker, is that it is pretty tough not to get the sausage roll and Chelsea bun proposition.

The group said yesterday that sales in the 19 weeks to 9 May were up 5.2 per cent, with the company hailing a successful Easter. For investors the same period was not so rosy: the stock was down 2 per cent in the past three months before yesterday's interim management statement, in a period, do not forget, when stocks across the board have staged something of a recovery. Ah yes, says chief executive Ken McMeiken, but the shares did not drop as far as others before the recovery.

We would still be a tad nervous and would be happier if there was a little more upward momentum. According to analysts at Numis, trading on 11 times December 2009 earnings per share, the stock is a hold. We agree. Hold.