Reed Elsevier
£294m spent on 25 acquisitions
In a third-quarter reporting season that has seen its share of disappointments, particularly among global businesses, Reed Elsevier is one of the exceptions. It has been grinding out revenue growth at 3 per cent, excluding the one-off effects of the timing of various big exhibitions and currency movements, for the past three years.
That rate was maintained at the halfway stage. Third-quarter revenue growth duly came in at 3 per cent, too. That methodical reliability is appreciated by the market and Reed Elsevier shares have gained 5 per cent since I recommended them in February for just that reason.
The gains were felt across the group, although inevitably there were differences. The scientific, technical and medical division undershot some forecasts after a quiet August for books at the all-important start of the academic year. Risk and business information outperformed forecasts. This has been the focus for acquisitions, accounting for half of the 25 so far this year.
The company has announced a joint venture in China that will provide data to car insurers there. That market is being deregulated to allow companies to distinguish more between individual drivers, and this and the growing number of vehicles on the road will make such data more valuable.
The legal market remains subdued in the United States and Europe, as financial austerity limits the amount of litigation taking place. Exhibitions are a lagging indicator, bookings typically taking place more than a year ahead, and economic recovery in America is driving growth there. If there is any weakness in exhibitions, it will probably be in China and Brazil, countries where Reed Elsevier is, as it is in the US, the market leader.
There seems to be no plausible reason why that 3 per cent growth figure should not be maintained into the fourth quarter. The company will also have the benefit of the recent fall of sterling against the dollar, as half its revenues are in the US currency.
The shares, up 2p at 982p, sell on 17 times earnings, yielding 2.6 per cent. As one analyst put it, Reed Elsevier shares are the safe place to hide in the media sector, which makes them a firm “hold”.
My advice Hold
Why Third-quarter figures are among the most reliable in the current reporting season. Shares are a safe haven in these markets
Unilever
3rd quarter sales £12.2bn, off 2%
It is a year since Unilever shocked the market with a warning that growth was slowing in the emerging markets that provide it with more than half its sales. The group was the first global consumer business to do so, and was followed by others.
This third-quarter reporting season has revealed further weakness from such businesses. Unilever’s performance was among the worst. Third-quarter underlying sales grew by 2.1 per cent; the market consensus was for 3.7 per cent growth. This many not sound like much of a miss, but for a business with annual turnover of €50 billion, it is an awful lot of unsold Knorr stock cubes and Dove body wash. It was also the group’s weakest performance since the end of 2009.
The positive was the Americas, with a 6.8 per cent rise despite continuing cut-price promotions in the United States. The negatives were Europe and China. European revenues were off by 4.3 per cent because of price deflation and poor ice cream sales in the disappointing summer weather. In China, the economic slowdown led to widespread destocking by distributors, although this should unwind by the end of the year, and a 20 per cent fall in sales.
By products, food disappointed, off by 0.5 per cent, which would seem to confirm Unilever’s decision to focus on home and personal care products. The company believes that it can continue to outperform markets that are growing at less than 2 per cent a year. The shares, off 94p at £24.40, are on approaching 20 times earnings. Not much to go for, then.
My advice Weak hold
Why Growth has stalled but shares are highly valued
Phoenix Group
Cash generated in nine months £438m
The performance of Phoenix Group’s share price is a paradox. This is exactly the kind of high-yield stock, above 7 per cent and pretty well guaranteed, that has done well in these markets in 2014, as investors have switched into the utilities, pharmaceuticals and tobaccos that have always offered a good income.
Yet Phoenix has changed little since the start of the year. It means that the discount to the embedded value, the metric used to measure such companies’ worth, has actually widened, which might not seem to make sense. The reason, of course, is the seismic change — and inevitable uncertainty — in the life and pensions industry brought about by measures in the chancellor’s budget and by two inquiries into pensions.
The third-quarter figures suggest Phoenix will generate cash this year at the top end of its forecast £500 million to £550 million, while it expects a total of £2.8 billion this year and over the next five, helped by the £390 million disposal of the Ignis fund manager. It suggests the dividend is safe, even if the uncertainty has limited the purchase of more closed funds. Up 9½p at 734½p, the shares are worth holding for that yield, then.
My advice Buy/hold
Why Dividend yield is among best in the market
And finally...
To anyone in the market, Cranswick means sausages, and always has. The company, however, is making its first big diversification, buying Benson Park, which produces cooked poultry, mostly chicken breast. No price is given, but the company has turnover of more than £40 million a year. Much of the Benson team is staying with the business, which is based in Hull — “Cranswick’s back yard”, a note from Numis points out, so the company is well known to it. Cranswick will fund an expansion that will double it in size.
