The Week In Review: ITV switching over towards profit growth

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The Independent Online

We are adding ITV to our portfolio of tips for 2005. The broadcaster's chief executive, Charles Allen, has launched ITV2 and ITV3, and plans a fourth channel to make sure that he keeps the group's audience share up even if ITV1 is doomed to decline in an age of channel-hopping.

We are adding ITV to our portfolio of tips for 2005. The broadcaster's chief executive, Charles Allen, has launched ITV2 and ITV3, and plans a fourth channel to make sure that he keeps the group's audience share up even if ITV1 is doomed to decline in an age of channel-hopping.

Advertising revenues will fall in tandem with audiences as the shift to multi-channel households gathers steam, but there is an offsetting gain for ITV. Its formula for payments to the Government for its analogue broadcasting licences means it pays gradually less as customers switch to digital. Further out, ITV's public service broadcasting obligations are likely to be watered down, freeing airtime for more lucrative programming.

Meanwhile, the combination of Granada and Carlton to form a single(ish) ITV last year will yield significant cost savings and help to generate substantial profits growth, even if the outlook for revenues is more mundane.

The share price is not excessive given that ITV's strong cashflows could make it attractive to a private equity bidder, and that the business could make a strategic acquisition for a US media giant in due course. We expect the stock to perform well for the rest of the year.

VANCO

Vanco is a telecoms group that, unlike many of it peers, has never had difficulty proving there is profitable growth in the industry if you know where to look. It leases capacity on other people's networks, selling it on to business customers. Companies as large and diverse as British Airways, Ford and Avis already rely on Vanco. Given the continuing evidence of success, buy the shares.

CI TRADERS

CI Traders dominates the retail and leisure industries of the Channel Islands. It runs the biggest chain of grocers across Jersey and Guernsey, owns the local brewery and many pubs, and now is moving into commercial property. However, debt levels are high, and the commercial outlook uncertain. Avoid.

BELLWAY

Margins will come under pressure across the housebuilding industry as companies work through land they bought at ever-rising prices over the past few years. In addition, wage costs are rising. This was the unnerving undercurrent in otherwise fantastic results from Bellway, but it oughtn't to frighten investors into selling. The likelihood continues to be that a sharp fall in house prices will be avoided. Hold.

STAGECOACH

Stagecoach is one of the UK's biggest bus operators, winning new passengers in London thanks to the aggressively pro-public transport policies of the mayor. It is also reporting an improvement in public confidence in the safety and reliability of the railways. Passenger numbers are up, particularly at its South West Trains. Hold.

PETER HAMBRO MINING

Peter Hambro Mining has big ambitions to be mining a million ounces of gold annually by 2009 from its projects in the far east of Russia. Between the idea and the reality, much can intervene to disappoint. With the speculative mining sector, after a strong run and a flood of flotations, in need of a pause for breath, Peter Hambro looks more of a hold for now.

DS SMITH

DS Smith, the paper and packaging business, warns that rising fuel and raw material costs are eating in to its results, forcing it to cut costs and hike prices to recover the damage. Except its customers won't accept all of the price rises, and it is finding it tough to identify cost savings in this labour intensive industry. A hold at best.

GAME

This year looks bad for the video games retailer. Much hinges on whether Sony's PlayStation3 and a new Microsoft Xbox will be available in quantity by Christmas. And this cycle of product launches will be less profitable than the last: Game will be competing with the expanding non-food ambitions of the supermarkets. Avoid.

TRADING EMISSIONS

The Kyoto treaty demands that countries reduce greenhouse gases. Polluters unwilling to do the necessary work to cut emissions can buy an "allowance" from another polluter who has cut by more than the target. Trading Emissions, has raised £135m to invest in the market for trading these allowances. It is high risk, but it looks like a fun punt.

WH SMITH

Under the instruction of Kate Swann, the retailer is back in the black. But once Swann has tarted up each of the group's core ranges and once the likes of Tesco have grabbed an even bigger chunk of the average weekly shopping bill, then Smith's shares will not look nearly so attractive. A tightening consumer environment is hardly the ideal backdrop to a recovery programme. Sell.

CHARACTER GROUP

The gift supplier has had to endure the sudden drop off in the growth of the digital camera market and a tough UK market for its toys, games and gifts. It is pinning its hopes on a range of Doctor Who merchandise, including a radio controlled Dalek, but it remains to be seen how these will sell. the shares look unappealing.

Pru passes out humble pie with more Tucker to come

Since angering investors with a surprise £1bn rights issue in October, Prudential's board appears to be have been on a constant diet of humble pie. But aside from wrong-footing the City, Prudential has very little to apologise for.

Since raising the money to expand its UK business, sales have gone from strength to strength, with most investors now reluctantly conceding that the cash-call was, in fact, the right move to make to capitalise on a return to saving by the UK public.

Prudential is well positioned ahead of this year's regulatory changes, where it expects to scoop new customers from making its financial products widely available through banks and financial advisers. With its first quarterly results this week, Prudential showed it is already ahead of the pace, as it targets 10 per cent sales growth this year.

Although it decided to withdraw from the immediate sale of Egg, its internet bank, after failing to receive a suitable offer, it is more than likely that this will be sold during the coming year, with at least part of the proceeds likely to be returned to Prudential's investors.

And with the highly respected Mark Tucker - the former head of Prudential's Asian operations - taking over as chief executive next month, the company arguably looks in better shape than it has done for a decade. Buy.

The above are recommendations from the daily Investment Column.

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