The Investment Column: Even natural disasters fail to blow First Choice Holidays off course

Takeover talk makes Lonmin worth holding as it keeps up production; Stick with European Motors as it weathers consumer downturn
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The Independent Online

Not so the gods. They haven't so much rained as poured natural disasters on the holiday company in the past 12 months. Quite a problem when you're in the business of selling beautiful places for customers in need of a holiday. What with tsunamis in South Asia and hurricanes in the US and Caribbean, it has been "one thing after another", according to Peter Long, the chief executive.

It speaks reams about the management's skill and the strength of their business model that such extreme natural disasters have not blown First Choice off the course to this year's double-digit earnings growth. Yesterday's trading update confirmed its plans were intact.

Ever since First Choice set sail into the world of high-margin, adventurous holidays six years ago, bidding farewell to the two-a-penny Spanish packages of old, it has not looked back. It did so just as holidaymakers became bolder in their choice of destination. The old commoditised, three-star hotel or flight-only, short-haul market now accounts for less than 30 per cent of its mainstream holiday revenues.

First Choice has made the specialist holiday market its own among the mainstream tour operators, giving it plenty of scope to build on what it has already achieved. It has spent £68m on buying niche travel businesses this year and has no plans to stop there. Meanwhile it is cutting its distribution costs by selling more trips online.

The main risk is that the consumer will go on strike, holidaying at home if at all. But this risk is outweighed by the management and its business model. On Panmure Gordon's upgraded 2006 forecasts, the shares trade on an 11.6 times profit/earnings ratio, which is not expensive. Buy.

Takeover talk makes Lonmin worth holding as it keeps up production

Lonmin is the rump of Tiny Rowland's dismembered Lonrho empire, one of the three biggest miners of platinum in the world, operating out of South Africa.

It is almost a year since cooling water leaked into a furnace at a smelter, causing an explosion that put it out of action for four months. And yet yesterday, the company was able to say that production of platinum in the year to 30 September, at 916,420 ounces, had been only fractionally lower than last year.

It is a strong achievement, and analysts were pleased yesterday it had been achieved while restricting cost growth to the level of South African inflation, which is running at 4.8 per cent. The shares rose 36p to 1,301p, despite signs that wage inflation may tick up in the future: the company had to agree to a pay increase of 2 per cent above inflation to avert a strike.

That is up 30 per cent since the start of the year, not just because of the recovery from near-disaster, but also because the platinum price has strengthened. It is now back to levels not seen for 25 years.

The precious metal is used as a catalyst in engines, reducing their emissions, and so has been in increasing demand thanks to ever-tighter environmental legislation in the West. It is also a popular metal for jewellery in the Far East.

Lonmin is not a very diversified company. It has two sites, mining one family of metals, in one country. The share price, perhaps 16 times next year's earnings, inevitably includes takeover speculation. Hold.

Stick with European Motors as it weathers consumer downturn

European Motor Holdings is one of the lesser known of the quoted car dealers, a sector dominated by the likes of Inchcape, Reg Vardy and Pendragon. It is small, certainly. But it is also pretty well-formed.

The company has assembled more than 50 dealerships concentrated in the north of England, and it is focusing on the higher-value end of the market. Its franchises are with BMW, Bentley, Audi and Jaguar, among others.

This year has been the second in a row in which UK new car sales have fallen, but the decline was entirely predictable as rising interest rates made car-credit deals less enticing and the consumer mood darkened. That it has been no worse than feared, and that industry bodies expect a shallower decline next year, is plenty of comfort, even as consumers rein in their spending.

The theory is that the value-car market will suffer more than the posher end of the market, in any case. And exhibit A in favour of the theory was yesterday's results from the company. It sold marginally more vehicles in the first eight months of the year than in the same period in 2004, in a market that was down 6 per cent overall.

When we wrote on EMH in April 2004 at 215p, we insisted that shareholders should not take their profits yet. At 278p, with a price-earnings ratio of 12 and a dividend yield of 4 per cent mean it is undervalued still compared to its peers. Hold.

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