Questor share tip: Beware Yule Catto bid talk

Since Questor recommended buying shares in specialist chemical group Yule Catto just over a month ago the stock has been swept higher on bid rumours. But the shares gave back their gains as it became clear that the speculation was off the mark.

Yule Catto
227p +2.4
Questor says BUY

The shares hit 253p on speculation that US sector giant Dow Chemicals was mulling a bid. RBS, Yule Catto's house broker, poured cold water on the rumours.

"Although one should never say never, we believe an acquisition is not very likely," Mutlu Gundogan, RBS's analyst, said.

The old stock market adage – never buy on bid hopes alone – applies in this case. The thing about such clichés is that they contain a large streak of truth. The fundamentals of a business are much more important.

Yule Catto has good exposure to emerging markets and it has pricing power in its markets to pass on rises in raw material costs, albeit with a lag.

Questor does not expect the shares to charge ahead – almost half of the company's sales are construction-related products for carpets and coatings and it is exposed to Western Europe. However the long-term prospects, especially when a recovery in Western markets gathers pace, look very sound.

The shares are trading on a December 2011 earnings multiple of 12.8 times, falling to just 9.3 next year. This is below its historical average – and the shares still look cheap. The yield is just 1.4pc.

First recommended on June 12 at 221p the shares are up 3pc after their recent bid-related journey, compared with a FTSE 100 up 1pc. The shares remain a buy.