Shares spotlight: Enodis | Expro | Johnson Matthey
Graeme Dickson is a sales trader at Lite Financial, an independent brokerage. He has been trading the financial markets for nine years, and is a regular contributor to several leading investment periodicals.
Here he focuses on one stock of note from the last few days' trading, and highlights one to watch out for in the coming week.
One you might have missed
Many years ago a broker many years my senior said that he found some of the best trades by jumping on a takeover situation after a potential suitor has been formally named.
On 9 April, Enodis (ENO) said it received a bid from America's Manitowoc pitched at 260p. The shares gapped up from the mid-150s to around 230p and then found 240p as a resting ground as many thought 260p was a knockout offer that was unlikely to attract a rival bid.
In early May it received a counter bid from the Illinois Tool Works company at 282p before Manitowoc countered at 294p a share. The stock currently resides at 306p as it awaits further action from the two bidders.
Another recent example comes from Taylor Nelson Sofres (TNS). The stock gapped up from 171p to 185p on 29 April after it received a merger proposal from pollster GfK. The stock subsequently drifted higher to 215p until WPP made a proposal which effectively valued TNS at 241p. The shares now trade at 255p again in anticipation of further bidding developments.
The stock that we identified last week as a relatively easy target, which was in the middle of takeover negotiations, was that of Expro (EXR), the oil services and equipment provider. The company received a cash bid from private equity investor, Candover Investments, at 1435p a share.
The stock traded some 70p above the price on rumours, which later turned out to be true, that US Oil services giant Halliburton was considering a takeover proposal for the company. The takeover panel placed a deadline of last Friday, as a 'put-up or shut-up' for Halliburton to declare an express interest.
We were buying in the low 1500s in anticipation that a trade buyer will be able to find more economies of scale than that of a private equity buyer, and therefore offer a higher price.
Sure enough on Friday, Halliburton offered 1525p, around the price the shares were hovering at the day before, which was later countered by Candover Investments at 1550p a share. The stock closed at 1626p, a reasonable 6% gain on a high conviction trade over the week.
This again demonstrates how straightforward making money out of an M&A situation can be made, once all the parties have been disclosed. Having said that I am quite wary of situations where a company has received a bid from an unnamed suitor, so it is definitely a case of buyer beware when playing takeover situations.
One to watch out for
Next week is a relatively quiet one for FTSE 350 stocks, but a stock that seems to stick out like a sore thumb comes in the form of speciality chemicals group Johnson Matthey (JMAT). The company's main business comes from platinum refinery and the making of catalytic convertors to filter car pollutants. It is also involved in research into platinum based cancer drugs and fuel cells.
The stock has risen a respectable 21% in the last year, while it is up 2% since the beginning of 2008. Johnson Matthey announced its third-quarter sales were up 18% on 29 January while it sees full year profits coming in at the top-end of analyst expectations.
The problem is not so much about the company coming in at the top end of expectations, but of the company's valuation proving to be too uncomfortable for analysts to recommend as a buy. The company trades on 25 times historic earnings falling to an estimated 17 times for 2010. This is quite steep compared to the likes of sector peer Croda (CRDA) at 12 times estimated earnings for 2010 and 14 times for Victrex (VCT).
Morgan Stanley recently issued an underweight recommendation with a 1670p price target, citing a slowdown in global automotive production combined with a lack of pipeline in its fine chemicals and catalysts division together with volatile platinum prices, as reasons not to purchase the stock.
The company reports its finals on Thursday 5 June and it will have to deliver not only at the top of analyst expectations, but conjure up an upbeat outlook in order for the company to regain its share price above the 2000p barrier.
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