The Investment Column: Diageo's trading update fails to excite as the competition hots up

But snapping on its heels will soon be the French drinks giant Pernod Ricard, which recently got approval to swallow Allied Domecq in a £7.6bn takeover deal. Diageo thought about throwing in a spoiler bid itself, but settled in the end for a few of Pernod and Allied's cast-offs - Pernod's Bushmills whiskey brand and most of Allied's New Zealand wine portfolio.

So with the last biggest consolidation opportunity for the drinks industry dried up, is there any way Diageo can start delivering growth to investors? A trading update yesterday did not immediately cause much fizz. Even Diageo's powerhouse of brands is suffering in Europe, where it gets nearly a quarter of its profits. Europe's economic slowdown is leading to consumers tightening their drinking belts, and sales are expected to be as flat this year as a month-old Smirnoff Ice.

The rising number of smoking bans across Europe is also having an effect on sales. Diageo is in the midst of a cost-saving programme, which has included moving production of Guinness back to Dublin, but more is needed to offset the volume decline.

Spirits are still rising in popularity in the US, as appetite for beer declines in favour of cocktail drinking. But growth in volumes across the group has slowed during the second half of the year, and organic volumes for the year will be no better than last year. The group is relying on price increases to improve margins.

Shares were inevitably affected by yesterday's terrible events in central London, but even before news of the explosions broke, shares were down 4 per cent. Diageo will continue to struggle in the mature Western markets it operates in and it now also faces an invigorated competitive threat in the shape of the new, bigger Pernod Ricard. There are few acquisition opportunities left to kick-start any transformational changes. At 805p, the shares look fully valued.

But Diageo's sheer scale and breadth of market coverage means its shares are worth holding on to.

Aga saga is unlikely to become a blockbuster

There can never be too many domestic goddesses for Aga Foodservice. Thanks to the Nigella Lawson-inspired craze for donning a pinny, demand is soaring for the ultimate in cookers: an Aga. Aga's prospects have been rising faster than one of Nigella's gooey chocolate cakes. The shares, which this column recommended tucking in to 12 months ago, recently hit a high of 328p. The group reported a good first half yesterday, thanks to "commendable" growth in its two biggest brands, Aga and Rangemaster. Given the current squeeze on consumer spending, a £3,000 cooker is a brave purchase, but the company reckons it will sell 15,000 this year.

With more than half of its business reliant on the cash-strapped consumer, the company is exposed to the high street slowdown. Sales at its Fired Earth paints business were down 5 per cent, and US sales were flat.

The group's foodservice arm offers more promise, thanks to its "revolutionary" Infinity Fryer. It's a deep fat fryer which apparently cuts fat from your burger and chips, but the company has to persuade major fast-food chains to place an order.

For now, we recommend banking some profits while keeping a few shares on the back-burner.

Kensington bucks the loans trend

As the housing market grinds to a halt, mortgage lenders have suffered. New home loan business across the market was down 14 per cent in the first half of 2005. But Kensington Group has bucked this trend. It reported an increase in new loans yesterday of 26 per cent over that period.

The big question for Kensington, which operates at the adverse end of the credit market, lending to those who would often be turned down by mainstream mortgage providers, is whether borrowers will be able to keep up with repayments. But so far, bad debt has increased only marginally - the number of customers who are more than 90 days in arrears rose from 7.3 per cent in October to 9.2 per cent in May.

In fact, there is no reason to expect a serious debt crunch. The Bank of England left base rates on hold yesterday and may still cut this year. And there has been no marked increase in unemployment, the other factor associated with a big rise in home loan defaults.

While margins in the mainstream mortgage market are paper thin, Kensington finds it easy to make money lending to cash-strapped borrowers. And as the bigger lenders become nervous about bad debt levels, the adverse niche will expand. At about 550p, Kensington's shares remain good value, especially while it remains the subject of takeover talks.

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