Investment Column: Healthy Boots is worth holding

Pick-up in sales boosts Renishaw's prospects
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The Independent Online

Yesterday's quarterly trading update was something of a soft test for Richard Baker's turnaround strategy at Boots, for it concentrated conveniently on sales and left to one side the more ticklish problems of costs, margins and profits.

Yesterday's quarterly trading update was something of a soft test for Richard Baker's turnaround strategy at Boots, for it concentrated conveniently on sales and left to one side the more ticklish problems of costs, margins and profits.

As far as it went, the numbers were respectable, but the stock market had second thoughts. At first the shares rose 3p to 672p, not exactly the equivalent of party popper time. Later, however, they slipped below their starting level to 668.5p.

At first it's hard to see what the market was being so curmudgeonly about. Group sales up 3.9 per cent, like-for-like retail sales up 4.4 per cent, Healthcare International up 3.5 per cent in local currency terms but only 0.1 per cent after taking account of the strong pound. Doesn't sound too bad.

The worries appear to stem from two points. First, although Mr Baker warned in March that profits for the year would be down thanks to redundancies and spending on refurbishment, analysts were still spooked by the advice yesterday that the current quarter's trading will be disrupted by "intense activity" to prepare the stores for Christmas.

And the statement made enigmatic reference to "changes in the German market and phasing of supplies". This turns out to refer to the German authorities' price controls on over-the-counter medicines. When price charges are imminent, supplies are naturally held back, so the problem should unwind.

Meanwhile, mainstream Boots departments look healthy. Prescription collections up 17 per cent, food sales up 11 per cent (M&S please note), fragrances up 10 per cent.

Photo is a black spot, because Boots has been hit by the switch to digital cameras. It is introducing kiosks that print digital pictures, but that looks a lost cause in the long run.

On the basis that thefirst-quarter nasties weren't too nasty and the goodies were quite good, shares look a worthwhile hold. Don't chase them yet, though.

Misys reaches turning point, but it is a high-risk bet

MISYS HAS seen its fortunes wane along with the industries that its software products serve, most notably the banking and securities sector that has been shedding jobs and contracting for the past three years.

Yet some leading analysts alighted on yesterday's full-year results as the first clear sign of a turning point in the troubled technology company's fortunes.

While overall sales were down from £1bn to £900m in the 12 months to 31 May and operating profits lower by £29m at £102m, the second-half performance was much more robust than the first.

Kevin Lomax, the chief executive, said that during the second half of the year banks around the world began to increase their IT budgets for the first time since 2001.

It appears that budgets in the current calendar year are being raised by 4-5 per cent. Hardly enormous, but better than the cuts of recent years.

The shares barely moved yesterday, down 3p at 183p. However, at these levels the company is trading at a 40 per cent discount to the software sector on a price-to-earnings ratio for the year to 31 May 2005 of 11.7 times.

Could this be the time to buy into a technology stock that during the madness of the boom had a share price above £12?

Given its relatively cheap rating, and its exposure to areas of banking software that Mr Lomax claims are showing signs of growth for the first time in several years, then now probably is a good time to buy - but only with cash earmarked for high-risk, speculative investments.

Pick-up in sales boosts Renishaw's prospects

Artificial joints, car manufacturing and laser surgery are all precise businesses, and Renishaw, which makes specialist measuring equipment to service these industries, charges a healthy margin for its products.

But the manufacturing sector has had a tough time in the past few years, and Renishaw has suffered from a fall-off in orders. A recovery now seems to be on the way, however, and sales activity has picked up considerably in the second half. The cost-cutting during the downturn is paying off and Renishaw yesterday said profits were up 13 per cent. While the UK remains tough, expansion into the growing economies in Eastern Europe gives it a healthy order book. Its determination to keep investing in its equipment and IT systems should also have put it in good shape for when the manufacturing recovery really takes hold.

At 540p, however, it is still trading at a hefty forward multiple of about 20 times. But with 35 per cent of the stock in management's control, there is always support for the share price. And in such high-margin business, a pick-up in sales, from its low cost base, quickly feeds through to the bottom line.

The outlook for global manufacturing looks fairly steady, and the chances of sudden negative news flow from the group is unlikely. Hold.

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