The Investment Column: Buy FirstGroup's bright bus idea

Bloomsbury's success goes beyond Potter - The future looks uncertain for volatile Gyrus
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The Independent Online

Ding, ding. All aboard the new concept in public transport, a bus that looks like a tram. The vehicle is being unveiled today by FirstGroup, the bus operator, which aims to put it on to the bus lanes of Yorkshire early next year.

Ding, ding. All aboard the new concept in public transport, a bus that looks like a tram. The vehicle is being unveiled today by FirstGroup, the bus operator, which aims to put it on to the bus lanes of Yorkshire early next year. The aim is to lure out of their cars those people who are too snobby to get on a bus, but would go weak-kneed at the sheer novelty of tram travel.

It is good to see a bus and rail operator innovating in this way, in cahoots with local authorities who are keener than ever to encourage public transport use.

First has already benefited mightily from the transformation of London transport by Ken Livingstone, the mayor, who taxed the rich who drive in central London to give to the poor, investment-starved bus network new routes. In other areas of the country, it is also working more closely with the authorities. In York, for instance, where it took analysts and investors for a day-trip yesterday, it has set up five lucrative park and ride schemes.

A trading update to accompany yesterday's jolly reassured that the finances are on track. Running the trains and buses is never going to be a high margin business, with cost pressures everywhere you look, from cash-strapped government bodies overseeing the railways, to fuel and wage costs in the bus industry, where there is still a big shortage of drivers. However, cash flows in these industries are pretty predictable and First is viewed as one of the more efficient operators.

The group has lost some rail franchises, but won the ScotRail contract to run all the trains in and into Scotland, which brings revenues of £400m a year and on which it ought to be able to make a modest margin.

On top of the UK bus and rail operations, FirstGroup has also expanded by acquisition in North America - and without the trading disasters which befell its peer, Stagecoach. First operates school buses in the US and Canada and urban bus services in cities such as Houston, Los Angeles and Denver. Cautious growth abroad ought to supplement steady progress in the UK and, with a 4.2 per cent dividend yield in prospect, it is worth hopping aboard.

Bloomsbury's success goes beyond Potter

With no new Harry Potter title published this year, Bloomsbury Publishing has had to conjure up its own growth outside the spell cast by the popularity of the teenage wizard.

First-half profits were up 4.5 per cent, thanks to its impressive record at spotting new publishing success, JK Rowling aside. Schott's Original Miscellany, a quirky collection of trivia, was sent to the group in the post, someone realised its potential and it is now selling internationally. Another debut novel, Jonathan Strange and Mr Norrell, by Susanna Clarke, has hit number three on the New York Times best-seller list.

As well as taking risks on new authors, Bloomsbury also has a roster of established authors, such as Joanna Trollope and Michael Ondaatje. Also, more than a quarter of its business is in reference books - solid, repeat titles such as Who's Who and Black's Medical Dictionary.

Most UK publishers license out their titles for publication abroad, but Bloomsbury has set up its own operations in the US and Germany. This does make for higher overheads and bigger risks if the books flop, but when there are successes, Bloomsbury can rake in better margins, sharing in up to 22 per cent of profits on book sales as opposed to 2 per cent from licence arrangements.

There are still two Harry Potter novels to come, which are guaranteed to be a success - the paperback version of Harry Potter and the Order of the Phoenix was published in July and has already become the best-selling children's book of 2004. Excluding a £37m cash pile, the company is valued at about 12 times earnings. Worthy of shelf space.

The future looks uncertain for volatile Gyrus

Gyrus, which makes machines and instruments for keyhole surgery, is being run as a serious commercial outfit, after outgrowing its origins as a research-driven technology group. A credible management team came in with some impressive sales numbers yesterday and, better still, inflows of cash that halved its debts.

The financial results are difficult to interpret, though, confused by write-downs and held back by the 12 per cent decline in the dollar. The company gives away most of its machines, making money instead on disposable surgical instruments, but has recently started selling some machines, creating scope for confusion among customers. And it was unclear just how much of the 42 per cent rise in sales by its US partners was the result of its partners stocking up rather than actual sales to hospitals.

Meanwhile, on the trading front, Gyrus's push away from specialist niches into general surgery has shown only mixed success so far and the launch of a hi-tech hearing aid has been a disaster.

There is just a tiny bit too much to worry about for a company whose shares are highly valued. The stock has been volatile since we said the company looked a long-term winner back in 2002, when it was 235.5p. Now 230p, potential investors should hang fire for a while.

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