The Investment Column: Benefits of Mothercare's deal need to be learnt

QXL Ricardo; Corac Group
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Our view: Buy

Share price: 403p (-6.75p)

Rather than taking it as a transformational deal, investors seem to have done their best to ignore Mothercare's £85m acquisition of Early Learning Centre, confirmed in April. Despite a strong run over the past six weeks, the shares remain relatively flat since the deal was finalised, even though most City observers still have high hopes for a very positive long-term outcome.

Yesterday's second-quarter trading statement contained enough good news to take the weak share price as a strong buying opportunity, and the chances are that the ELC acquisition will still transform this business both in the UK and abroad.

Sales across the group were 38.3 per cent better, with second-quarter UK like-for-like sales 3.9 per cent better at Mothercare and 1.9 per cent better at Early Learning Centre. Performance was boosted by a very strong performance from Mothercare's non-UK operations. International sales were up by more than 20 per cent.

More important, the integration of the two businesses appears to be on track. The group has already combined 21 Mothercare – more than double its original target – and ELC stores, and its £8m cost-saving forecast looks conservative. The company hinted about an extended roll-out of the combined format yesterday and, given the cross-selling opportunities, it is hard to see many franchises turning down the combination store concept.

We remain as bullish about the combination of Mothercare and ELC as we were when the deal was first announced, perhaps even more so as the shares are now 10 per cent cheaper.

The shares are still not in the bargain basement, trading at 14 times forecast 2008 earnings. However, this is a defensive high-street business with exciting growth potential, and as such deserves to trade at a premium to its peers. With Christmas coming up, typically the busiest time of the year for ELC, and the roll-out moving ahead of schedule, the risk looks to the upside. Buy.

QXL Ricardo

Our view: Risky buy

Share price: 1286p (-42p)

Of course, with the benefit of hindsight we would all be millionaires. Anyone lucky enough to have taken a punt on the online auction group QXL Ricardo back in January 2005 would now be sitting on something like a profit of about 2,450 per cent. It's as if the dotcom boom never ended.

That said, comparison to the dotcom boom is unfair – this is a real business making real profit, and plenty of it if the evidence of yesterday's interim results is anything to go by.

First-half revenue rose by almost 200 per cent to £30.6m, with trading profit up by 235 per cent to £7.7m. Pre-tax profits of £6.8m were up from just £1.8m in the first half of last year and the numbers were ahead of City forecasts on every level.

The huge surge in QXL's share price was mainly down to it winning a lengthy legal battle to regain control of its Polish assets, which are the main driver of growth and revenue. But it is expanding fast elsewhere in eastern Europe and in Scandinavia and Switzerland, where the industry behemoth eBay has very little presence. Recent launches in Romania and Bulgaria are performing well, as is the 30 per cent stake in Molotok, Russia's leading online trading group.

This is by no means a stock for the faint of heart, and according to forecasts from Citigroup the stock trades on more than 41 times forecast 2008 earnings. However, that number is expected to fall fast, and even the most conservative analysts expect the company to maintain growth of at least 30 per cent for the next three years.

The chance to make a real overnight killing on QXL may have been and gone, but for high-risk investors there could still be plenty of upside left in this stock. A risky buy.

Corac Group

Our view: Buy

Share price: 53p (+3.5p)

One of the problems with gas production is that when the pressure in a field falls it becomes very difficult to carry on pumping.

Pumping a gas field is a little bit like putting a pin prick into a balloon. At first the air rushes out, but by the time about two thirds of the air has escaped the pressure falls to a level where no more gets out. As a result, most gas fields are abandoned with large amounts of gas left behind.

The AIM-listed Corac Group has developed technology called Downhole Gas Compressors that artificially increase pressure and therefore the amount of gas recoverable from depleted fields. The potential for this technology is enormous – the broker Numis Securities believes that just 0.5 per cent market penetration could results in revenues of £400m for Corac.

The technology is not expected to go into commercial use until the middle of 2008, but the early signs are very encouraging. Yesterday, the company announced that testing at the Spadeam well in Cumbria has produced positive results and Corac's partners in the testing are equally enthusiastic.

Corac's partners are not exactly Mickey Mouse either – ConocoPhillips, ENI and Repsol are major league oil groups. Testing is due to be expanded and Corac already has customers lined up for when the testing is complete.

This is not one for widows and orphans, and at this stage there are no meaningful numbers to go on. But Corac's technology has huge potential and with natural resource prices soaring the demand for Downhole Gas Compressors could be substantial. Worth a punt.