The Investment Column: Johnson Matthey has benefited from climate concerns and is worth buying

JD Wetherspoon; SCi Entertainment
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The Independent Online

Our view: Buy

Share price: 1,525p (+44p)

Johnson Matthey, the world's largest manufacturer of catalytic converters, has enjoyed a prosperous few years, as climate change and the environment have climbed their way up the political agenda. All vehicles in the US and UK are now fitted with emission reducing converters, while Johnson is also cashing in selling similar appliances to heavy industry.

The catalysts division now accounts for almost two-thirds of group sales, and this will be even higher once the company has completed the sale of its ceramics division within the next few weeks.

Johnson is no one-trick pony, however. The group also has a solid pharmaceuticals division, which enjoyed a return to growth last year after a poor 2005 and, with several new and exciting contracts under its belt, looks well poised to continue improving into 2007.

The company's fourth leg, its precious metals division, proved to be the star of 2006, with profits up more than 20 per cent over the six months to the end of September, boosted by rising metal prices.

In spite of warnings yesterday that the sale of the ceramics business will be dilutive to earnings this year, and that the company's bottom line is continuing to be hit by the weakening dollar, Johnson looks in pretty good shape.

Environmental legislation in all of its key markets looks set to drive sales in its catalysts division for some time to come, while the other businesses are also on a solid footing.

Trading at more than 18 times this year's forecast earnings, the shares are not cheap. But after a long period of underperformance compared to their peer group, and the prospect of continued double-digit earnings growth, all the signs are the shares can go higher. Buy

JD Wetherspoon

Our view: Take profits

Share price: 700p (+36.5p)

JD Wetherspoon toasted another sparkling set of sales figures yesterday. Shares in the pub operator jumped 5.5 per cent after it revealed like-for-for-like sales increased by the same amount over the Christmas period.

The company is preparing for the fall-out from the smoking ban that will extend into Wales and England in April and July respectively, but early signs seem promising. Wetherspoon has managed to steal a march on its competitors by already converting a number of sites into non-smoking pubs. For three years, it has had a policy of only opening non-smoking premises and now operates 61 smoke-free pubs outside Scotland and 39 inside. Although sales dipped in pubs north of the border when the ban was introduced, Wetherspoon said yesterday trading in Scotland was ahead of expectations in the 12 weeks to 21 January with like-for-like sales up 3.9 per cent.

Last month, the group said it was so confident the ban would actually encourage more customers into pubs, it unveiled plans to open 30 new venues this year - double the amount in 2006.

But there are growing fears that consumers, hit by higher interest rates and rising energy costs, may have to tighten their belts over the coming year.

Although the more bullish analysts point out Wetherspoon still has considerable pricing power if conditions get tougher - with its drinks 23 per cent cheaper than standard list prices - it is hard to overlook the many uncertainties surrounding the stock, especially at its current valuation.

After a 90 per cent rise in its shares over the past year, Wetherspoon is now trading at a considerable premium to its peers. Now is the time to take profits.

SCi Entertainment

Our view: Buy

Share price: 488p (+2p)

The video games maker SCi Entertainment used the force in the first half, with continued strong sales of Lego Star Wars helping to boost sales 40 per cent. More impressive was that half of its sales were derived from new releases such as a game based on the hip 1990s' film Reservoir Dogs.

SCi expects an even stronger second half, with the star turn a 10th-anniversary edition of the original Tomb Raider game. It will launch its first titles for the new Nintendo Wii console and has started plotting its release schedule around the European launch of the PlayStation 3, including new versions of Hitman and Championship Manager. It also has a plethora of potential hits after signing a deal with Warner Brothers to develop games around characters like Bugs Bunny.

SCi still trades on a 60 per cent discount to its global peer group and analysts see value up to 650p. Warner Brothers has already snapped up a 10 per cent stake in the group. Buy.

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