In these panic-stricken days, the main concern for investors is whether or not they should bail out of the stockmarket. My advice is to continue to sell anything that is either pumped up on a racy valuation (such as Autonomy and Michael Page), or temporarily inflated by private-equity interest (Sainsbury’s). On both counts these shares – priced to perfection – look vulnerable. This week’s ‘Turkey of the Week’ is another such stock. Conversely, if your portfolio selection has been based on sound economics, then I would hold on for now. Distressed selling of quality companies into a falling market can prove expensive over the longer term, as my first tip below shows.
Tip of the week: Computacenter (CCC), tipped as a BUY by Panmure Gordon
Shares in Computacenter (CCC) are trading at near seven-year lows on the back of the recent market turmoil. The company is a ‘value-added reseller’ of IT and networking equipment, boasting Cisco, HP and IBM among its major partners. Growth in the industry is being driven by the trend among companies to outsource their IT repair, maintenance and helpdesk operations to specialist third-party providers such as Computacenter. The firm is the UK market leader and a top-three player in France and Germany. Customers include Arcadia, BT and North Yorkshire council.
This is a notoriously cut-throat industry, with slim margins because of the continual decline in hardware prices and strong competition. However, prospects are picking up; the sector should receive a boost from the launch of Microsoft Vista (the new version of Windows); the massive growth in new internet ‘2.0’ services; and the convergence of fixed and mobile communications. Moreover, computing giant Dell is planning to end its exclusive direct sales model and allow third-party distributors, such as Computacenter, to resell its products.
Last year, Computacenter’s sales were £2.27bn, delivering a 1.5% operating profit margin, broadly in line with the competition. However, the group aims to improve returns by turning around its continental European interests, targeting more lucrative, smaller customers, and continuing to drive down costs. It is also bulking up its higher-margin services division, which represents 23.5% of turnover. The firm bought Digica, a data-centre management specialist, for £28m in January – and followed this deal up in April with the acquisition of Allnet, Cable & Wireless’s property cabling unit.
City analysts expect 2007 sales and underlying earnings per share of £2.3bn and 16.6p respectively. That puts the shares on an undemanding p/e ratio of 12, falling to 10.5 in 2008 – with net debt standing at a comfortable £29.4m as of December 2006. Fine, but what do we need to watch out for? Well, it’s not an industry for the fainthearted. In July, the company said that first-half operating profits would be flat on last year, held back by “a disappointing performance in the UK”. There are also risks associated with integrating acquisitions.
Nonetheless, trading at near seven-year lows, with a robust balance sheet and an enviable blue-chip customer base, I believe the shares offer good value.
Recommendation: BUY at 198.25p
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments