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Questor: Aggreko is expensive, but this is why it's poised for growth
Ashtead, the FTSE 100 equipment rental specialist, has done this column a good turn, with a healthy 20pc-plus gain since its selection in early November, and it may now be worth investigating one of its rivals, Aggreko.
Aggreko’s shares have markedly lagged those of Ashtead and although the former look more expensive, on 16 times earnings for 2017 to Ashtead’s 13.5, the FTSE 100 firm is operating at peak profitability whereas Aggreko, a member of the FTSE 250, has just suffered four straight annual drops in earnings. This is where the opportunity lies.
Around half of Aggreko’s business overlaps with that of Ashtead in the US equipment rental market, providing mid-sized power generators.
If President Trump gets America to invest in infrastructure projects this operation should benefit, although this opportunity is now fairly well understood.
The real secret to Aggreko could be the power solutions business, which may be about to reach a welcome turning point after a difficult couple of years.
This unit rents out large-scale power generators to meet any power shortages for governments and utilities. Capacity utilisation seems to be rising and once it hits the 70pc‑80pc range the profits can start to motor.
A strong schedule of major sporting events in 2018 provides a good range of potential contract wins. The stock could be poised for a comeback after a difficult 2016.
Questor says: Buy
Ticker: AGK
Ladbrokes 2022 retail bond
It is notable that several indicators of investor risk appetite – the prices of copper and oil, America’s Russell 2000 small-cap index and the Dow Jones industrial transportation sector – all topped out in early December.
The declines were not severe at about 2pc‑3pc, but the momentum in the Trump “reflation” trade seems to have waned a little.
We are also overdue a pick-up in stock market volatility after a fairly quiet spell during which moves of more than 1pc in a day in the FTSE 100 have been relatively rare.
Putting these two trends together means it may be worth making sure that portfolios have a bit of ballast. The Ladbrokes Group Finance retail bond, which pays annual interest of 5.125pc and matures in 2022, looks like a good option to consider.
A fall in the bond’s price from 110p to 103.2p means the yield to maturity is 4.6pc. Interest is paid twice a year.
The price has been pleasingly resilient in the face of the introduction of a new horseracing funding scheme, a new levy on bookmakers’ profits and running concerns over a regulatory review of fixed-odds betting terminals.
The bond’s BB rating means there are risks and trading has been tough for all high street bookies, but this is a still a nicely cash-generative business.
Questor says: Buy
Ticker: LAD2
Update: Pearson
Hopefully readers heeded our warning in December to give Pearson a wide berth as the shares have subsequently lost a quarter of their value, hammered by last Wednesday’s profit warning and admission that a dividend cut would be coming in 2017.
The chief executive, John Fallon, cites cyclical issues such as excess inventories of textbooks in American campus bookstores and sliding student numbers in the US, but the problems appear to run much deeper than that.
This is a structurally challenged company owing to the rise of “open education resources”, which allow universities to make best-of-breed educational materials freely available.
Students and lecturers are able to copy, use, append and even modify the documents and cut down on the expense of buying or renting the sort of textbooks provided by Pearson.
The firm’s decision to halve the rental price of more than 2,000 eBooks was a huge admission of weakness and investors should continue to steer clear.
Even a halved dividend could still leave the stock on a 4.4pc yield at current prices, but that looks like classic value-trap territory as the group has serious problems.
Questor says: Avoid
Ticker: PSON