Wednesday tips round-up: BHP Billiton, Serco, Pearson

10th Aug 2011 06:50

Funny how the same ideas come around again. Several decades ago, vertical integration ? owning every step of the production process ? was the norm. Then that gave way to employing contractors and squeezing them to gain efficiencies. Now, in mining, the old model is coming back into vogue: BHP Billiton is paying $735 million for the contractor responsible for almost 70 per cent of the production at its three huge iron ore operations in Pilbara, Western Australia. BHP also has to fund $80 billion of capital expenditure over the next five years, and there must be some chance that falling asset prices will spark further deals in the near future. More will be known when the company announces results in a fortnight, but the shares, a Tempus tip for this year, should be held, according to Tempus at the Times.Volatile equity markets can create investment opportunities and I believe this to be the case with outsourcing specialist Serco. While Serco has an enviable track record of delivering shareholder returns, this has not been the case over the past year with the share price generally stagnating and more recently moving lower along with the market. The de-rating and more recent market related price movements mean the shares are trading on a prospective 2012 price-to-earnings ratio of about 11.6x, significantly below its historical average. I consider this is just too low for a company offering good-quality defensive earnings, which are forecast to increase in a low-growth economic environment. Buy, recommends the Scotsman.While it may still be best-known for brands such as the Financial Times and Penguin Publishing, under the firm management of Dame Marjorie Scardino, Pearson has been transformed into an education powerhouse. At the end of last month, Pearson announced revenues were up 6 per cent in the first half to £2.4bn over a year earlier. Profits were up a fifth to £208m as education profits rose 30 per cent. Turning to the shares, Pearson has outperformed the European market by more than a fifth so far this year. Still, UBS puts the stock on a multiple of 7.5 times estimated earnings for next year, which, as the broker points out, "grossly undervalues the resilience and potential cash-flow growth". We quite agree and would make the most of the market's mistake by adding to our portfolio, the Independent suggests.When the demerged shares in Punch Taverns and Spirit Pub Company started to trade at the beginning of last week, both were quite perky, ending the day just ahead of where they started. The argument that splitting the pub estate into two would persuade the market to value them at more than the combined entity seemed reasonable. Punch may come good, though this is option money you should be prepared to lose. Spirit shares look cheap, but only if you think the positive self-help by management will be enough to counter any further falls in consumer spending, according to the Times.The British Retail Consortium and KPMG survey yesterday confirmed what almost all non-food retailers have known for some time: life is tough, particularly for those selling "big-ticket housing-related purchases". Topps Tiles, the UK's largest tile and wood flooring specialist, is also battling a stagnant housing market, which is being hit by low levels of transactions. Those tempted should also note that consumer spending concerns have floored the shares this year, so much so that they now trade on a forward earnings multiple of just 8, a discount to the rest of the sector. This, and the positive mood music on margins, makes us believe Topps is worth a punt in these turbulent times, recommends the Independent.BCPlease note: Digital Look provides a round-up of news, tips and information that is impacting share prices and the market. Digital Look cannot take any responsibility for information provided by third parties. This is for your general information only as not intended to be relied upon by users in making an investment decision or any other decision. Please obtain a copy of the relevant publication and carry out your own research before considering acting on any of this information.