The Investment Column: Don't give up on Taylor Woodrow and Westbury despite the current climate

It's the wrong time to buy Carpetright - No need to go phishing for SurfControl shares
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The Independent Online

Taylor Woodrow and Westbury, two of the UK's big house builders, were singing from the same hymn sheet yesterday - and they weren't performing an uptempo number.

Taylor Woodrow and Westbury, two of the UK's big house builders, were singing from the same hymn sheet yesterday - and they weren't performing an uptempo number.

The housing market has improved a little from the weakness at the end of last year, but it remains considerably more difficult to sell homes than it was a year ago. Both companies said competition is getting tougher and that builders are increasingly having to offer incentives to buyers. Westbury is running an expensive television advertising campaign.

Neither Taylor Woodrow nor Westbury were willing yet to predict their likely performance for 2005 as a whole. Consumer confidence and the outlook for interest rates are too murky at the moment.

Taylor Woodrow is by far the bigger of the pair. It is spread across the UK, where it built 9,054 homes last year compared with Westbury's 4,361.

Both companies had originally promised more and, partly as a result of these disappointments, neither has the highest reputation with the City.

Indeed, the pair are usually cited as the most likely candidates to be taken over, if there is another wave of consolidation.

Taylor Woodrow, with its bottom-of-the-industry returns on capital and smaller-than-average bank of land for future development, would make a sizeable morsel but the deal could prove profitable for a management able to operate it more efficiently.

Taylor Woodrow also has the advantage of a substantial US house-building business, which is growing towards 30 per cent of group operating profit. It has operations in five states including Texas, Florida and California, where the market is still strong. This offers some protection if, as is likely, profit margins fall sharply this year in the UK because of high wage and raw materials costs and stagnant selling prices.

Westbury does not have this protection, but its shares, down 7p to 420p yesterday, are among the cheapest in a dirt-cheap sector. Westbury has been punished for its performance over the past year, where it has grown earnings by substantially less than its peers.

Both builders are urging investors to look through the short term uncertainty and focus on the UK's chronic shortage of housing, and shareholders absolutely shouldn't sell out. Hold on for the long term, or for a takeover bid.

It's the wrong time to buy Carpetright

Carpetright controls about a quarter of the UK's £1.8bn-a-year floor coverings market, but this is a market that has taken a sharp turn for the worse.

In the past three months, the company's sales have fallen by about 8 per cent on the same period last year, as fewer people move house and others hold off on giving their home an expensive makeover.

Carpetright has also suffered from the collapse of Allders, where it had in-store concessions, although a trading update yesterday revealed that the disruption was minimal.

Also yesterday, Lord Harris of Peckham, the chairman, was talking up the prospect of property disposals, which should underpin a dividend yielding more than 5 per cent at the current share price. The company is moving out of prime retail sites and into trading parks.

In December we warned it was too late for new investors to get involved, but we should have been firmer in advising existing shareholders to lock in their profits. The cooling of the housing market and of consumer spending has pulled a rug from under the stock, and it is difficult to see them making much progress for a while. Avoid.

No need to go phishing for SurfControl shares

Sophisticated fraudsters are going "phishing" for your online banking details and other secret internet passwords. It is the latest hi-tech threat to be added to a list of nasties that already includes viruses and spam. SurfControl, the computer software company which started life with a product to filter out porn, has been expanding its suite of filters to satisfy the demands of corporate customers for a one-stop shop.

The old market for e-mail and web filters is looking well developed now, and SurfControl's sales growth has slowed. The question for investors is what the outlook for revenue growth is with the new, broader products. It is a hard call, and caution should prevail.

What is for certain is that SurfControl has had to spend more than it intended on product development and marketing. Earnings figures for the third quarter of the company's financial year, released yesterday, were disappointing and were accompanied by a warning that the full-year figure will turn out at the bottom of the range of City forecasts. SurfControl shares - which we have been advising readers to sell since they were 770p in November 2003 - fell 37p to 515p on yesterday's news.

Steve Purdham, the chief executive, insists the investment will pay off. There were some good numbers within the results, including high levels of software licence renewals and good sales in Asia, but investors were focused instead on the poor performance of SurfControl's US distributors .

Having fallen 12 per cent since we last wrote about them, the shares are now valued in line with the software sector, but the risks remain high. Avoid.

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