US Edition G4S
250p-3p
Questor says BUY
Organic growth, which excludes the impact of acquisitions, slipped slightly to 4.2pc for the first nine months of the year, compared with 4.8pc in the first half.
This is still a good result considering the current climate. G4S has enjoyed average organic growth of 6.5pc since 1996, which takes it through at least two economic cycles. At the peak of a cycle it can reach more than 10pc. At the nadir, that dips to around 4pc.
Focusing on organic growth also slightly misses the point. G4S announced two years ago that it intended to grow by buying into areas that offer higher margins, such as war and conflict zones.
The company spent almost £600m on acquisitions last year. It is thought to have around £500m of headroom on its balance sheet and has announced its intention to spend another £100m this year.
That will be spent on small companies to broaden the scope of services it offers. Last year, for example, G4S bought a company, which specialised in mine clearance.
So far, the strategy is working. Margins improved by 0.2pc in the first three quarters.
The company benefits from huge geographical diversity, with business in 110 different countries. New markets, such as Asia and Latin America, provided around 12.3pc of the organic growth over the past nine months.
Around one third of its business is with the US and UK governments. The company expects to win more public sector contracts in these straitened times, as governments seek to outsource more of their security work.
G4S has been at the centre of a number of security related scandals. The company is in danger of losing the contract to guard the US embassy in Afghanistan after photos emerged of guards having wild, drunken parties. Last year, it lost contracts in the US because guards fell asleep on the job at a power plant.
These incidents can be incredibly damaging for its reputation, not least costly in terms of lost contracts. G4S insists they are isolated events in a company with a staff of 600,000 people, and were quickly dealt with.
Questor bought G4S in November last year at 195½p. The shares have risen 28pc since then, marginally ahead of the market.
They still look good value at around 12 times next year’s earnings. This is slightly below European peer Securitas, and G4S arguably has a better strategy.
The shares are yielding 2.9pc and the company has declared its intention to increase dividends in line with earnings.
This is a defensive stock that looks good in both a down and upturn. A solid buy for these uncertain times.
IMI
529½p +69.7p
Questor says Buy
IMI, the engineering group that makes valves used in climate systems in hotels and shopping centres and drinks dispensing systems in football stadiums, is worth investing in. The last time we tipped IMI we said that one concern we had was that a slowdown in the economy could hit the group. And so it proved.
Soon after we tipped the company as a buy in March 2008, shares fell from 528p to a low of around 220p.
However, the company is bouncing back and is looking like a solid recovery play.
Yesterday it brought forward an interim management statement from November 18 to say that its earnings for 2009 are likely to be "materially" ahead of the market's current consensus figures.
The shares leapt by 69.7p to 529½p.
IMI said that revenues are around 18pc lower than last year at constant currency levels.
However, the actions its management has taken to mitigate the profit impact of lower revenues are continuing to have a positive effect.
The company said that low-cost sourcing initiatives and value engineering programs have reduced material prices in the year to date by around 5pc. Meanwhile, lower average metal prices have also produced margin benefits.
The group also has continued its programme of transferring more production to low-cost economies.
These actions will benefit both operating margins and earnings per share over the year and the overall levels of demand are broadly stable, although Europe remains subdued.
City analysts were impressed. Arden Partners said that the main areas of strength were the Fluid Power and Indoor Climate divisions.
The broker described IMI as a "bellwether engineer".
Earlier this month RBS said that between 2004 and 2008 IMI resembled a curate's egg – good in parts.
It believes that its drinks dispensing business will achieve better growth than it has been seeing, which makes IMI a more compelling investment case than it was.
Some analysts in the City say that their 2010 estimates remain on the conservative side due to potential headwinds in IMI's so-called later cycle businesses.
A lot depends on the speed of recovery of construction in the private sector.
The shares are yielding around 4.5pc and we think that they offer good value. Buy.