Time to Buy These 5 Stocks?

03/29/2013 7:00 am EST


Harvey Jones of The Motley Fool UK takes a look at five stocks that represent very different corners of the London stock market, and not surprisingly has varied advice for investors.

I've been popping stocks into my shopping basket in recent weeks and it's about time I took one or two to the checkout. Here are five stocks I've found tempting. So should I buy any of them?

Going Continental
InterContinental Hotels Group (London: IHG) has enjoyed a barnstorming five years, growing 160%. And it just keeps rising, up 15% in the past three months alone.

This UK-listed global hotel chain group is a play on the recovery, particularly in the US, where it earns 45% of its revenues. When business starts doing business again, and travelers start traveling, its room occupancy rates will rise (and they're pretty full already).

Every year, 153 million people spend a night in one of its nine brands, which include Holiday Inn, Crowne Plaza, and InterContinental. Yet the group doesn't own the physical hotels, having sold most of them and signed long-term management contracts to lease them back from the new owners.

This leaves InterContinental light on assets, heavy on profits. Full-year results showed revenues rising 4% to £1.83 billion ($2.78 billion) in 2012, and operating profit up 10% to £614 million. The dividend was also hiked 16%. It now yields 3.3%, covered a meaty 2.2 times.

InterContinental's exposure to the US and China has helped it survived the slowdown in Europe, but trading at 21 times earnings, it does looks expensive. With forecast earnings per share (EPS) growth of 11% this year and 9% next year, there is plenty upside, but you will pay a price for it. More of a hold than a buy.

Losing My Compass
Contract caterer Compass Group (London: CPG) is another barnstormer, again up 160% over five years and 14% over three months.

The company, which provides food and support services to businesses, schools, hospitals, universities, and sports facilities, employs 500,000 people across 50 countries, and serves four million meals a year.

As if that wasn't enough, it has diversified into reception and office services, desk cleaning, and routine maintenance. Given all the offices in all the world, that gives it an almost unlimited target market.

Compass trades at £8.34. Bank of America has just lifted its target price to £9.25, and nailed it as a buy. Forecast EPS growth looks positive, at 8% in the year to September 2013, and 11% over the 12 months after that.

As with InterContinental, recent successes make it expensive, trading at nearly 20 times earnings. The dividend is relatively disappointing, yielding just 2.6%. A great buy in the next correction.

Pick Up a Pearson?
Pearson (London: PSON) hasn't done so well lately, with management warning of tough trading conditions. Pearson, which owns the Financial Times, publisher Penguin, and a thriving educational division, currently trades at £11.67, down 3% on a year ago.

Yet its profits held up in 2012, with full-year sales rising 5%, and adjusted operating profit up 1% to £936 million. International education revenues rose 13%, and 25% in emerging markets, as yet another FTSE-100 favorite finds the going less sticky in the emerging world.

Pearson is one publisher that really does get digital. The FT's digital readership is growing strongly, with subscriptions up 18% to almost 316,000, while e-books now account for 17% of Penguin's sales.

EPS growth looks shaky this year, with a forecast drop of 5%, rebounding to 13% in 2014. You can buy it at 13.2 times earnings and pocket a 3.8% dividend covered 1.9 times, and recently hiked a progressive 7%.

Brokers have been downgrading Pearson since its recent results, with many now underweight. If its current massive restructuring plan does bear fruit, patient long-term investors could reap the rewards. Now might be a nice entry point.

Apple's Sweet Spot
Last year, everybody wanted a piece of Apple (AAPL). Its share price soared to $700, as its portfolio of iProducts conquered the world like nothing before, and profits seemed destined to rise 45% a year forever and ever.

But that level of innovation is tricky to maintain, and what do you do when almost everybody seems to own an iPhone? Check out Samsung's product range, was one response.

So is Apple rotten to the core? Hardly. It now trades at $450, down 35% from its peak. That makes now a better time to buy than six months ago. Canaccord Genuity is keen, reiterating its buy rating with a target price of $600, reduced from $650. Sterne Agee also hails this stock a buy, while slicing its target price from $715 to $630.

The Apple backlash was inevitable. I don't expect the growth glory days to return, with Steve Jobs gone and the tablet market looking increasingly crowded. But its sales and market share are still massive. Its customers are loyal (I'm writing this on a MacBook, after years of Dell hell, and I'm not going back).

Markets have had their fun, and successfully lowered expectations. If the cash keeps coming in, or Apple's miserly yield suddenly becomes masterly, as some anticipate, now could prove a sweet spot.

Bunzl in the Oven
Everybody knows Apple. Bunzl (London: BNZL) is a bit more obscure, but has its fanboys as well.

When I reviewed this specialist distribution group in mid-February, one ardent supporter sent posted this message: "Superb company. Exceptional track record, wonderfully diverse, in an attractive industry." It is hard to disagree.

Bunzl supplies businesses around the world with a range of not-for-retail goods, such as food packaging, catering equipment, stationery, bags, cleaning supplies, face masks, and swabs. Humdrum stuff that companies plough through every day of the working week.

But there is nothing humdrum about Bunzl's share price performance, up 27% in the past three months alone. That's hardly surprising, with a better-than-expected 5.8% rise in pre-tax profits to £324 million in 2012. Bunzl has been on the acquisition trail, which can be risky, but its 13 new purchases have added £500 million worth of annual revenues.

Management was happy to hike the dividend by 7%, although at 2.2% covered 2.9 times, loyal investors might hope for more.

This is yet another stock that now looks toppy at 18 times earnings. Bunzl clearly has plenty of fans out there. For that, you get steady forecast EPS growth of 7% this year and 6% next. But maybe we could all do with a little market correction right now.

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