Share tips of the week – 20 May

Three to buy

Adobe

Shares

Software firm Adobe has consistently strong financial performance, exposure to structurally growing markets and a powerful balance sheet. The company is a dominant player in the production of digital content, through programs such as Photoshop and InDesign, and controls 50% of the creative software market. Its tools are also likely to make it “a key creative force in building the metaverse”. Sales have grown from $9bn in 2018 to $15.8bn in 2021, with 92% from recurring subscriptions. “Once the global economy and markets are able to find some stability, Adobe will once again win the recognition the business richly deserves.” $376.91

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The Telegraph

This retailer’s shares have fallen amid concerns about the impact of the cost of living crisis. But it has the financial strength to survive and take advantage of changes in the sector. Next expects to generate £220m surplus cash in 2022 and some of that could be spent on acquiring stakes in businesses that could join its “total platform” – a service that lets other sellers use its online infrastructure in return for a cut of sales. 6,052p

Serco

The Sunday Times

“Straitened state coffers tend to trigger an outsourcing boom.” That should be good for Serco, which provides services at prisons, hospitals and other state facilities, yet markets haven’t priced the possibility in. Business is already strong – it won £5.5bn of work last year – and it is paying regular dividends again, yet trades on a price/earnings ratio of just ten. “The company looks set to flourish even as Britain’s economy wilts.” 147p

Three to sell

ITV

The Times

This broadcaster is aiming to launch a new streaming service, funded from inconsistent advertising revenue (set to be 6% lower than this time last year) and cash from its studios business. The project is “fraught with risk”. The launch, content and streaming data and technology will cost £65m this year, and £200m in 2023. Analysts expect pre-tax profits to shrink from £746m last year to £725m and £625m this year and the next. Avoid. 6,846p

Marshalls

Investors’ Chronicle

Paving company Marshalls has just bought the roof tile maker Marley at an enterprise value of £535m, but investors remain unconvinced by the deal. The price is roughly twice what Marley fetched in a private equity sale three years and intangible assets make up a large part of the purchase value, creating a greater risk of writedowns if trading doesn’t meet expectations. The repair, maintenance and improvements sector, which accounts for 53% of Marley’s sales, is heavily exposed to price rises, and after growing strongly last year, sales may shrink this year and next. Marshalls’ sales in its domestic end market are already down 8% this year. Sell. 578p

Telecom Plus

The Telegraph

This multi-utility supplier has a strong business model and is well-placed for growth – with many energy suppliers going out of business, households will be looking for new ones. A period of investment in its services may be drawing to a close, which should lead to higher profits. However, the stock trades on almost 30 times forecast earnings for the year to March 2023, which looks a full valuation. “Time to (reluctantly) take profits.” 1,562p

...and the rest

Investors’ Chronicle

Watches of Switzerland has a customer base that should cope with rising inflation, since fluctuations in home energy or food costs aren’t going to dissuade customers for high-end goods. Buy (931p). CMO Group, which sells building products online, has been hit by supply-chain disruptions. Sell (127p). Plastic maker Victrex has faced “double-digit” cost headwinds after Russia’s invasion of Ukraine sent oil prices soaring. Sell (1,668p).

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Home Reit buys and maintains properties for homeless people for a fraction of what it costs local councils to house people in less suitable accommodation. Its income is linked to inflation. Buy (120p). Science-kit maker SDI forecasts sales for the year to April 2022 to be £49m, up from £35m in 2021. Buy (170p). Professional services provider K3 Capital is well diversified and buffered against economic stress. Buy (230p).

The Mail on Sunday

Private-equity firm Oakley Capital has a conservatively-valued portfolio of growth companies. Buy (415p). Phone network Airtel operates in 14 African countries and has huge growth prospects. Buy (138p).

The Times

Residential landlord Grainger has a growing portfolio of 7,400 properties with occupancy at a record 98%. Buy (289p). Software firm FD Technologies has increased its profit and revenue guidance for 2022, driven by exceptional performance of its KX data-analysis software business whose revenues rose by 25% last year. Buy (2,415p). Gas firm Energean should turn profitable after starting production at its flagship Karish project in Israel this year. Buy (1,292p).