Pearson (LSE: PSON), Ocado (LSE: OCDO) and WH Smith (LSE: SMWH) were in favour with investors in last week’s wobbly market, and all three have made further gains in morning trading today.
Are these stocks set to outperform in what is shaping up to be a difficult year in the markets?
Pearson
Shareholders of Pearson have had a rough time over the last 10 months. The value of the company has almost halved over the period, as restructuring and drastically reduced profit expectations have taken a heavy toll.
However, the shares jumped 17% last Thursday after the company released a trading update. Pearson announced a further round of restructuring, but the shares were boosted by news that the Board intends to maintain the dividend.
The company gave earnings-per-share (EPS) guidance of between 50p and 55p for 2016, which would barely cover the dividend of 51p, but the Board expressed its “confidence in the medium term outlook”.
Pearson has disposed of its prize media assets the Financial Times and the Economist, and a divestment of its last remaining media stake, in Penguin Random House, seems likely to follow in due course.
I’m unconvinced by Pearson’s strategy of selling the family silver to invest in “a significant medium-term market opportunity” in digital educational courseware and assessment. And a price-to-earnings (P/E) ratio of 14.5 and precarious dividend yield of 6.7% don’t tempt me.
Ocado
I thought the valuation of online grocer Ocado was too rich when I looked at the company last summer. At a share price of 378p, Ocado’s EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortisation) was a sky-high 32.4.
The shares are 100p lower today, and trade on an EV/EBITDA of 23.1. That’s still a relatively high rating, supported by investors who continue to see the potential for ‘something big’ to happen.
Ocado has been telling us for what seems like an eternity that it has received interest from potential international partners, but its “target of signing a first agreement during 2015” failed to happen. However, the shares jumped last week after the Daily Mail ran a story headlined: ‘Amazon set to swoop on Ocado as it prepares to launch a fully-fledged grocery delivery service in the UK’.
A bid, or a big international deal (or deals) may or may not happen. But I find it hard to see that Ocado’s current valuation is merited based on its existing operations.
WH Smith
WH Smith has been well-managed to consistently grow annual profits and cash flows in the face of flat revenues. Growth in the group’s Travel division (airports, railway stations and so on) has offset declining High Street sales, and a focus on margins and cash generation has delivered superb long-term returns for shareholders from both share price appreciation and dividends.
The shares made another leap last week, following the release of the company’s latest trading update. Of particular note, was 0% revenue growth in High Street like-for-like sales for the 20 weeks to 16 January — the first time in more than a decade that sales in the division haven’t shrunk! The performance over the five-week period to 2 January was actually positive at 2%, and, as a result, the company said: “we expect profit growth for the year to be slightly ahead of plan”.
With the shares above 1,800p, WH Smith trades on a P/E of 19 with a dividend yield of 2.4%, which seems about fair, rather than outstanding, value.
