The Week In Review: Outlook not so sweet at Thorntons

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The Independent Online

Thorntons is like a box of chocolates: you never know what you're going to get.

Thorntons is like a box of chocolates: you never know what you're going to get.

Investors who buy the shares now are buying a historic chocolate manufacturer and owner of 600 shops where expansion opportunities and sales growth are limited, but which has instead been growing sales by supplying its luxury confectionery to supermarkets.

But, next month, the company's newish executive chairman, Christopher Burnett, is unveiling a review of that supermarket strategy. He fears it could mean that chocolate lovers no longer need to visit the high-street outlets and, worse, that supermarkets will become over-mighty clients, demanding supply in preference to Thorntons own stores, forcing down prices and ultimately taking the luxury sheen off the brand.

Axeing supermarket sales altogether robs the group of top-line growth (such sales were the bright spot in an otherwise disappointing Christmas for Thorntons), and restructuring the manufacturing business to shore up profitability if it moves to a half-way house will not be easy. These are perils enough ahead without a share price that is so high (at about 17 times earnings) it is vulnerable to shocks. Avoid.

ARM HOLDINGS

When ARM Holdings unveiled the biggest acquisition in its history last August - the $1bn purchase of Silicon Valley-based Artisan - investors couldn't understand the point. Just as the doubters had been won round, we got news this week of appalling results from Artisan in the final three months last year. The jury was back out again on the whole deal. Very long-term investors can use these flurries as a buying opportunity. Those with a one-year horizon are advised to steer clear. The stock is vulnerable to shocks as semiconductor sales growth slows and digital gadgets get cheaper, cutting ARM's royalty rates.

ML LABORATORIES

ML Laboratories has a habit of running out of money. It is developing or helping to develop a handful of new drugs; treatments to reduce complications after surgery, to deal with kidney problems, and to tackle cancers. There's also a business developing a novel inhaler. The company raised £14.4m a year ago, but most has been spent.

There's talk of profitability in the current year. There was similar talk in 2002, when we last wrote on this stock. Much rests on signing licensing deals and trials of early-stage products. There's far too little headroom, far too high a chance that the money will - yet again - run out.

JOHN LAING

Unlike most of the quoted companies bidding for lucrative government contracts to build schools, hospitals, roads, courts, whatever, under the Private Finance Initiative, Laing doesn't do any of the building or later maintenance work itself. It organises the bid, manages the work, and then sits back and reaps the long-term income from the government. Or, in the future, it could sell its stake in the whole project. It is these future sales that are key to Laing's value, and the reason that the shares look undervalued at their current price. Buy.

COLEFAX

Luxurious, flower-patterned wallpapers and fabrics are the height of decor chic this decade. And the curtain is rising on a revival at Colefax, the little company that owns the historic Colefax & Fowler and Jane Churchill brands. In the US (which accounts for 55 per cent of group sales), the decline in the dollar has masked an improved volume of sales, and the company has just opened a showroom in Washington DC to push things further. Europe will continue to be difficult, the UK pedestrian, but even here the fashion trends ought to prevail. Hold.

PUNCH TAVERNS

Your local boozer may well be a Punch Taverns pub, and yet you probably wouldn't know that it was part of one of the biggest pub groups in the country. Punch doesn't go in for chains or brand names. Its landlords run their pubs as their own, but pay rent and buy beer from Punch.

Following an acquisition spree over the past 18 months, Punch has nearly doubled in size to 7,800 pubs, and there are substantial further opportunities ahead. Meanwhile, the business is proving that it can grow sales at existing venues. The prospect of having to ban smokers is perhaps a threat to trade, but at least the landlords have until 2008 to prepare for this. Buy.

MISYS

Finally, last year, banks began spending on IT again, and Misys saw faster order-growth that ought to feed through to a better second half of the financial year. Many investors and analysts are sceptical of the quality of Misys's products and potential, but the shares sit at a too-big discount to the software sector. One possible catalyst for improved sentiment will be the spin-off or sale (in whole or part) this year of Sesame, its network for independent financial advisers. Changes to the way the industry is regulated are creating a class of IFA selling a limited number of companies' products, and Sesame has new systems that can support them in compliance. Speculative buy.

Sales fall prior to radio merger

Capital Radio and GWR, the soon-to-be-merged radio companies, are playing the same tune - as far as trading is concerned. Both groups were supposed to be on an improving trend as far as advertising revenue is concerned, but both said this week that sales were down in the final three months of last year. January, too, has been flat or negative.

The contracting top line seen at both companies at the end of last year gives further credence to the view that their merger - which has regulatory clearance and should be completed in early May - was largely defensive.

The deal got through competition watchdogs largely unscathed, but critics of the transaction point out that this was because the companies have limited overlap - meaning that bringing the two together does not strengthen their position in any particular regional or national markets.

The combined group encompasses regional leaders, and will be the big beast in the sector, which should help it protect the premium rates that its flagship stations can command from advertisers. But the shares of the two companies have already priced in the limited benefits of the merger, including head office cost savings of £7.5m.

Investors ought to hunt for value elsewhere. The still-growing Chrysalis provides the most interesting opportunity in the radio sector. GWR/ Capital is a hold at best.

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