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Investment Column: Pearson is a good bet in turbulent times

Topps Tiles; Group NBT

Nikhil Kumar
Wednesday 10 August 2011 00:00 BST
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Our view: Buy

Share price: 1,090p (+27)

In the current market mayhem, stock picking is a treacherous business. In that context, this column is turning to one of its perennial favourite defensive stocks: Pearson.

While it may still be best-known for brands such as the Financial Times and Penguin Publishing, under the firm management of Dame Marjorie Scardino, Pearson has been transformed into an education powerhouse.

At the end of last month, Pearson announced revenues were up 6 per cent in the first half to £2.4bn over a year earlier. Profits were up a fifth to £208m as education profits rose 30 per cent. While its core North American business has come under some pressure, the slight drop in sales has been more than made up for in the emerging markets.

The company has carried out a series of successful, relatively small, acquisitions to help it expand in India and China, and the company's finance director Robin Freestone revealed at the results that there was a £500m war chest to target further deals.

Yesterday saw it turn to more mature markets, with the acquisition of Stark Holding in Germany. Stark, whose revenues were €20m in the year to the end of July 2010, makes educational materials, including resources to help pupils and teachers prepare for tests. Pearson said the deal diversified its operations in the country and added that it would enhance adjusted earnings per share in the first full year after the acquisition.

Turning to the shares, Pearson has outperformed the European market by more than a fifth so far this year. Still, UBS puts the stock on a multiple of 7.5 times estimated earnings for next year, which, as the broker points out, "grossly undervalues the resilience and potential cash-flow growth". We quite agree and would make the most of the market's mistake by adding to our portfolio.

Topps Tiles

Our view: Buy

Share price: 46p (-0.5p)

The British Retail Consortium and KPMG survey yesterday confirmed what almost all non-food retailers have known for some time: life is tough, particularly for those selling "big-ticket housing-related purchases".

Topps Tiles, the UK's largest tile and wood flooring specialist, is also battling a stagnant housing market, which is being hit by low levels of transactions.

Against this dire background, Topps, which has 313 UK stores, has performed robustly recently and said its like-for-like sales only fell by 1.9 per cent for the 13 weeks to 2 July. More significantly, the retailer's management saw scope for its gross margin – the difference between the price at which a retailer buys and sells stock – to be up by about 190 basis points in the second half.

The company, which exited its operation in Holland in 2010, also said it did not expect "any material change to trading patterns" in the final quarter of its financial year.

Those tempted should also note that consumer spending concerns have floored the shares this year, so much so that they now trade on aforward earnings multiple of just 8, a discount to the rest of the sector. This, and the positive mood music on margins, makes us believe Topps is worth a punt in these turbulent times.

Group NBT

Our view: Hold

Share price: 445p (-5p)

Group NBT issued a trading statement saying its earnings will be ahead of expectations yesterday.

Its business is in managing internet domain names and hosting websites. And it boasts an impressive blue chip client list featuring the likes of British Airways and Centrica.

The market has been improving and the ever-changing nature of the internet has helped drive business. What's more, a recent French acquisition (domain name producer Indom) has outperformed.

Whether the current happy outlook will continue if we slip into another recession is harder to predict. But NBT has proved itself to be resilient. And it is fortunate in that it offers such a key service. Internet hosting and domain name management are an essential part of modern business

As such, NBT should stand firm. That said, while its shares have come off a bit, they are only just below a 10-year high and are trading at 17.5 times forecast full year earnings. While we might be inclined to buy if the shares dip a little way below the 400p level, they look no better than fairly valued at the moment.

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