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Goldman: time to look for value?

Could it be time to trade out of defensive stocks and look for value?

That’s the question some investors have been asking themselves, and Goldman Sachs today highlighted one key question for those facing that dilemma: hold onto UK water stocks, immune from the value-destroying effects of inflation and dependable in a market crisis, or look for value elsewhere?

The Goldman note says UK water stocks United Utilities, Severn Trent and Pennon have outperformed the market, staying static at a time when the market has fallen 9%.

That is starting to make them look expensive.

Following these moves, the UK water companies are trading at a significant premium to historical multiples on a sector-relative basis. UU, SVT and PNN are trading at a 50%-60% P/E premium to the sector average, compared to a five year average of between -10% and +10%. Similarly, UU and SVT are on a P/E premium of 63%-73% to the FTSE100 (five-year high).

The upside for the three, Goldman says, is about 15%, whereas it thinks the sector more broadly could climb 34%.

Our Sell, relative to other utilities, is predicated on our expectation of rising commodity prices and an economic recovery (our economists forecast UK GDP growth of 2.5% for 2012). Were investors to continue to seek defensive, inflation-protected investments, the UK water stocks may continue to outperform the more cyclical end of the sector.

United Utilities was 1.6% down today, Severn Trent 2.4% down, and Pennon 1.8% down.

Elsewhere among today’s brokers’ notes, UBS’ buy note on caught the eye.

The upshot of the UBS note is that the current price implies that everything bad that could happen will happen.

At the current price of just over 100p, is trading at levels last seen in the aftermath of the Lehman crisis. This is despite the prospect of €55m of merger synergies (representing 33% of 2010 EBITDA) the demise of a key competitor and, arguably, better than ever prospects for a re-entry to the US poker market.

100p implies near ‘armageddon’…
Concerns over German regulation were the key driver behind our Neutral-rated initiation note. However, a reverse DCF shows that the market is currently implying not only 100% loss of German EBITDA, but 1% longer-term top line growth, margin pressure, attributing no value to the US opportunity. Even on black sies assumptions where German profit is lost and trading deteriorates markedly, we reach a valuation of 7.7x 2012 EBITDA – no higher than historic levels.

In the short term UBS suggests that the online gambling group’s results at the end of August could also be bad, meaning the shares could fall further – or, as it puts it, “potentially providing an even better entry point”.

The stock is the top mid-cap climber today – rising 6.7% to 112p. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds