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Should I Buy These Shares? IMI plc, Hammerson plc, The Sage Group plc, Meggitt plc And Capita plc

I’ve been popping stocks into my shopping trolley in recent weeks and it’s time I took one or two to the checkout. Here are five tempting stocks from April and May. Should I buy any of them?

IMI

When I checked out IMI (LSE: IMI) in April, its share price had soared 151% in five years, against just 9%  growth on the FTSE 100. It is up another 22% since then, which is good news for me, because I called it a solid buy, and urged investors to put their faith in this specialist engineering stock. IMI has relatively little exposure to the UK economy, earning 90% of its revenues overseas, although as the UK flirts with recovery, that is less of a selling point than it was.

A strong balance sheet, healthy cash generation, and a £175 million share buyback programme all look good. Earnings per share (EPS) growth has slowed over the past couple of years, which suggests IMI may struggle to repeat recent successes, but forecast growth is 10% for 2014. Citigroup recently handed IMI “most preferred” status and forecast “further significant margin upside, driven by both mix and restructuring”. Shame it only yields 2.6% and trades at a pricey 16.9 times earnings. That makes it a solid hold.

Hammerson

I’m not often tempted by stocks trading at around 24 times earnings, but real-estate investment trust (REIT) Hammerson (LSE: HMSO) is an exception. In May, I was worried by its decision to exit London office space to focus entirely on retail, given droopy consumer confidence and online competition, but management is clearly happy, having just announced a sharp rise in pre-tax first-half profits from £13.9 million to £80.8 million, and a 2.5% rise in like-for-like net rental income to £140 million. Forecast EPS growth is a robust 21% this year (dipping to 9% in 2014) and operating margins are a fruity 60%.

As a REIT, Hammerson is committed to distributing 90% of its taxable income to shareholders, and the current forecast yield is 3.6%. It is more expensive than the average REIT, which trades at 20 times earnings, and its major investment programme adds a layer of risk. But high group occupancy at 97.4%, management confidence and a recent 7.8% dividend hike makes Hammerson one to add to your shopping list.

The Sage Group

In May, I concluded that business management software specialist The Sage Group (LSE: SGE) knew its onions, but I was baffled that so few brokers found it to their taste. Its subsequent interim management statement was upbeat, with strong growth in the UK, Ireland, the US and emerging markets offsetting a slowdown in Europe (where have I heard that before?). Sage even served up a special dividend of nearly £199 million, and bought a further £40.5 million of shares via its buyback programme. Yet net debt grew strongly in the three months to 30 June, up from £231 million to £445 million.

Forecast EPS growth looks solid at 12% to 30 September and 7% next year, and although the yield is only so-so at 2.9%, dividend policy is progressive. Yet brokers abound in lacklustre verdicts such as ‘equal weight, ‘underweight’ and ‘sell’. That still looks harsh to me, although trading at 17.9 times earnings, I’m in no rush to buy either.

Meggitt

In May I concluded that component maker Meggitt (LSE: MGGT) looked a solid, long-term buy, but was unlikely to go great guns. That was too downbeat, because it is up 15% since then, against just 3% for the FTSE 100. It is up a whopping 190% over five years. I was worried about Meggitt’s exposure to defence spending cuts, but it has plenty of diversification, earning just under half its profits from civil aerospace. It also has an energy arm.

The yield is disappointing at 2.1%, but forecast EPS growth of 4% this year and 10% next looks good enough. Can Meggitt continue its recent blazing share price performance? Deutsche Bank sees “insufficient upside” at current prices, and downgraded Meggitt from ‘buy’ to ‘hold’ last month. At 15.1 times earnings, that looks about right.

Capita

Outsourcing giant Capita (LSE: CPI) has enjoyed a strong three months, with its share price growing 15%. I thought it looked pricey at 17.3 times earnings in May, now it trades at 19.6 earnings. That is down to a strong first-half, including a 13% increase in revenues to £1.82 billion and a 10% rise in both underlying profit before tax to £205 million. Capita also boasted a record £2 billion worth of major contract wins, including Telefonica UK, Carphone Warehouse and the London Borough of Barnet.

Investors were winners too, with the interim dividend up 10% to 8.7p. Capita’s strong sales performance and healthy pipeline of business augur well, and future EPS growth is solid. Its valuation doesn’t look quite so daunting, once you see it is lower than the average for the support services sector, of 23 times earnings. One to add to your watchlist.

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> Harvey doesn’t own any of the shares mentioned in this article.