US Edition Hill & Smith
344½p +7½
Questor says BUY
Hill operates in three divisions – infrastructure, galvanising and building and construction products.
You probably pass one of Hill & Smith's products every single day. If you have been driving recently, it is likely that the central reservation barrier in the middle of the road was made by Hill. They also make road safety barriers, street lighting columns, temporary car parks and those road messaging boards that tell you to slow down. In fact, orders of the variable message boards are currently at record levels – with the order book secure into the middle of next year.
The group also recently supplied the parapets for the new Formula One circuit in Abu Dhabi, which highlights its international exposure. The company generates just under 60pc of revenues from outside the UK.
The building and construction operations provide roofing systems and safety handrails used in large infrastructures such as schools. This aspect of the business is obviously suffering – although yesterday's trading update was particularly upbeat. The company said full-year earnings per share would be at the higher end of the market consensus, helped by favourable exchange rates, lower tax and interest costs.
Overall, it said trading for the period had been ahead of expectation in the infrastructure and galvanising businesses, but it continued to be challenging in the smaller building and construction products group. Order intake in the rail business has been weak, but the company is bidding on the first tranche of station platform extension tenders – an area in which Hill is confident about the future.
Although a lot of stimulus money has been spent in the US, the lion's share of this has been on consultants in the planning and organising stage. Next year, the group expects US roadworks will start and this should generate new orders.
Positively, the group now expects galvanising volumes in the second half will fall 12pc, which is an improvement on its previously stated expectation of a 20pc fall. Galvanising volumes fell 25pc in the first half of the year.
The company sees year-end net debt of £100m to £105m, after a sharp fall in the first six months of the current financial year.
The fact that the company has cut costs significantly also means that there is a good deal of operational leverage to an upturn.
The company upped its interim dividend by 9pc when it reported results in August, which is positive for the full-year pay-out. Investors who bought in on the initial recommendation would have locked in a yield of about 5.2pc, but after strong gains the shares are now yielding 3.3pc.
The dividend is covered 3.3 times by earnings, so there is more scope for improvement in the pay-out when market conditions improve.
The shares were first recommended on June 28 at 202p and they are now 70pc ahead of the initial recommendation price. Trading on a December 2009 earnings multiple of 9.2, falling to 8.7 next year, the stance on the shares remains buy based on the group's international profile and the full impact of stimulus money on US roadworks next year.
Vodafone
135¼p -3.7
Questor says BUY
The telecom operator was recommended for two reasons – its relatively secure dividend and its growth prospects driven by new technology and increasing penetration in emerging markets.
Vodafone boasts of 2m new customers in India each month – but its task here is to turn these into profitable customers, using internet as well as phone services.
Although the shares are a touch lower than the level at which they were recommended on September 27, the investment case still stands. In fact, the pay-out rate has improved with the share price fall – and investors can now buy into the shares and lock in an impressive 6pc yield.
The group's recent interim report was reassuring, although there was some concern about margins in the second half of the year. The company said it would double its cost-cutting programme to £2bn.
There was also good news on the costs front. Vodafone will also hit its £1bn cost-reduction target one year early, in March 2010.
The first six months of the year showed that the company is pretty resilient.
Vodafone posted a 73pc rise in pre-tax profits in the six months to September 30 to £5.7bn, on revenue up 9pc to £21.8bn. The company also reiterated its
full-year guidance of operating profits of £11bn to £11.8bn and free cash flow of £6bn to £6.5bn.
This level of impressive free cash flow is what makes the shares attractive for income seekers.
The company has also committed to raising the payout over time, so buying in at this level is a shrewd move for long-term income seekers.
The shares were first recommended on September 27 at 141.75p and the shares are 4pc below the recommendation price.
The shares are trading on a March 2010 earnings multiple of 9.3 times, falling to 8.9 in 2011. The cash generative abilities of the world's largest mobile group and its prospects in new markets means the stance on the shares remains buy.