Investment Column: Hold on to Amec, there's more to come

IMI; 888 Holdings

Our view: Hold

Share price: 746.5p (-31p)

Shares in Amec, the oil services group, eased yesterday as the group issued its interims but it's hard to blame the numbers for the fall. A lower oil price has hit the entire industry so pre-tax profits at £88.4m, down just 4 per cent, was a very creditable result. At the EBIT level (earnings before interest, tax and amortisation) the company made £94.5m, up 25 per cent. Yesterday's sell off was probably a result of traders buying on the rumours, selling on the result.

Overall there seems to be little doubt that Amec is doing well. Management certainly expects the second half of the year to be better than the first and the fact that the interim dividend was raised by 15 per cent to 6.1p from 5.3p is another sign of confidence.

The stock, which fell as low as 377.5p in October, has come far since the beginning of this year, closing well above 700p last night. It rose above 800p earlier this week. So the question that has to be asked is whether there is enough left in the tank to make the shares worth buying at this level.

To be sure, the group's performance is no aberration. The wider FTSE All Share oil equipment and services index has also rebounded strongly this year. But that may only imply that the entire sector is ripe for profit-hungry punters that are getting twitchy about the prospects of a sustained recovery.

On the other hand, Amec is trading at 16.5 times this year's forecast earnings, falling to 14.9 times next year's. That is still a relatively undemanding rating, particularly if the oil price continues to rise and that translates to greater sector activity. Still, having risen so strongly, we fear the shares may tread water for the next few months, at least until there is more certainty on the economy and its impact on commodity prices.

Nonetheless, Amec is a quality operation that we think is a good holding for any portfolio. So hold for now but be ready to wade in again if the shares fall in the next few weeks.

IMI

Our view: Buy

Share price: 454.9p (+53.5p)

IMI's interim results came as a bolt from the blue for analysts. The engineering group defied expectations, smashing through consensus forecasts with 18.5p in adjusted earnings per share, compared to hopes of around 13.3p. "Probably the best results of the entire reporting season," UBS exclaimed, summing up the mood in the market.

Forecast upgrades will no doubt be forthcoming in the days ahead. But the shares are up well over 50 per cent this year. After plumbing the depths as the market convulsed at the end of 2008, falling as low as 220p in November, compared to above 500p earlier that year, the shares have traded back up above 450p. Cautious investors will rightly wonder whether it is too late to hitch a ride on the IMI train. No is the short answer.

As Numis highlights, the group – which says underlying demand may have stabilised following the sharp reductions seen in parts of its business earlier this year – has managed to contain costs and hold pricing despite the challenging economic backdrop. This is important, we think. Having weathered the downturn by cutting back, IMI is well positioned to exploit the recovery. Moreover, for all their strength, the shares trade at just 10.6 times 2009 earnings, according to Cazenove. That is an undemanding rating given IMI's potential Add to the mix the healthy 5.2 per cent prospective dividend yield and there is but one message: buy.

888 Holdings

Our view: Sell

Share price: 86.75p (-7.6p)

888's results are a tale of two halves; the online gaming group's business to business offering – which sees the company providing gaming services for others – is going like a train, with operating income up by an impressive 42 per cent. Unfortunately, the much larger (at least for now) consumer-facing operation looks to have hit the buffers with its operating income down by a fifth. As a result, overall revenues were down to $118m (£73m) from $135m.

Pre-tax profits also took a hit, down by around a third to $15m. It is not all bad news, of course. Gambling laws around the world are slowly liberalising and some move towards licensing in the US is expected sooner or later as politicians cast hungry eyes in the direction of the potential tax revenues. But 888 still has not settled its issues with the US Department of Justice, and that means the shares come with significant uncertainty.

At 15 times 2009 forecast earnings, the stock is hardly cheap, given the uncertainty and problems in the consumer-facing operations. There is also a question over the dividend going forward. At some point 888 could certainly become an M&A target, which offers some potential upside, but at the moment there is just too much uncertainty in the stock to be taking a punt. We are sellers at these levels. There are better opportunities elsewhere.