Will this week’s winners Royal Bank of Scotland Group plc (+19%), Ladbrokes plc (+18%) & Pendragon plc (+17%) continue to rise?

Roland Head explains why Royal Bank of Scotland Group plc (LON:RBS), Ladbrokes plc (LON:LAD) and Pendragon plc (LON:PDG) are climbing this week — and whether they can continue.

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One of the biggest winners of the last five days is bookmaker Ladbrokes (LSE: LAD). Shares in the high street stalwart have risen by 18%, after the Competition and Markets Authority provisionally agreed to allow Ladbrokes’ merger with Gala Coral.

The main condition for the deal is that the combined group will have to sell up to 400 shops. That represents about 10% of the two group’s total of 4,004 shops in the UK. It shouldn’t be a big problem.

If the merger goes ahead, Ladbrokes and Coral expect to be able to make cost savings of at least £65m per year. Given that Ladbrokes’ pre-tax profit was just £52.5m last year, that’s a significant saving. Online growth is also expected to accelerate.

However, I think it might make sense to wait until after the merger has completed before considering an investment in Ladbrokes. The firm will take on £1.35bn of debt and nearly double its share count to fund this deal.

It’s not clear to me whether the current share price offers good value, so until I know more, I’m staying away.

Hidden value in this bank?

Shares in Royal Bank of Scotland Group (LSE: RBS) have surged higher over the last week, climbing 19% to 250p. The trigger for the gains seemed to be a rather technical announcement on Tuesday relating to the issue of £85m of new shares.

In short, RBS seems to be selling new shares to partially offset the cost of interest payments on some of it debt. This will help protect the firm’s CET1 ratio of 15.5%, which is one of the highest in the UK banking sector.

To be honest, I’m not sure whether this news was the reason for RBS’s big gain this week. But I can see that the stock remains a classic value play. The shares trade at a 30% discount to their tangible net asset value of 352p, and RBS has an increasingly strong balance sheet.

RBS investors will need to be patient, but with the shares now trading on just 11.5 times 2017 forecast earnings, I think further gains are possible.

Buyback boost as market booms

Automotive retail group Pendragon (LSE: PDG) — which includes luxury dealer Stratstone and volume-seller Evans Halshaw amongst its dealerships — laid its cards on the table this week. The company said that it had been unable to find suitable acquisition targets, and would therefore be launching a £20m share buyback programme to return cash to shareholders.

Companies are often tempted into buyback programmes when their shares look expensive. Arguably, that’s the case here. Car dealers have enjoyed boom conditions since 2012 and Pendragon’s share price has tripled over the last four years.

However, the firm’s shares don’t look too expensive relative to earnings. At 41p, they trade on a multiple of 13 times five-year average earnings, and a 2016 forecast P/E of 10.5. There’s a risk that car sales are nearing a cyclical peak, but even if they are, car dealers should still have a strong pipeline of servicing and repair work for cars under warranty.

Personally, I’d rather see Pendragon’s management using this cash to reduce debt, ahead of any future downturn. Earnings per share growth is expected to fall to a pedestrian 4.5% next year. I think there are better choices elsewhere.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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