The Investment Column: Meggitt should keep flying high

No rush to check out of Jurys Doyle just yet - Shire Pharma offers reward as well as risk
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The Independent Online

It is an expensive version of clay pigeon shooting: Meggitt builds remote-control planes sent up as target practice for army and air force personnel training with missiles.

It is an expensive version of clay pigeon shooting: Meggitt builds remote-control planes sent up as target practice for army and air force personnel training with missiles.

This diverse specialist engineering company also makes parts for civil aircraft, a wide range of electronics products and other military items such as aerospace components and "counter-measures" - things flown or thrown from aircraft to distract enemy missiles.

It is a pretty solid business, with very strong relationships with the military on both sides of the Atlantic and with their principal manufacturers. As in investment, the attraction is the strength of the company's cash flows, which still well cover the interest bill, despite the £427m acquisition of Dunlop Aerospace last year. Dunlop brought Meggitt the ability to build wheels and brakes and engine-related components for civil and military aeroplanes. The acquisition also means a higher proportion of the group is concentrating on spares and maintenance contracts with its customers, contracts usually more profitable than the original manufacturing.

Dunlop was an unusually large deal for Meggitt, but it channels a lot of its cash into business purchases as a matter of course. It must do so, and must invest almost 10 per cent of group turnover into internal product development, to stay ahead of its competitors with hi-tech and reliable products.

In 2004, pre-tax profit rose 28 per cent to £56.6m on turnover up 19 per cent, despite the dollar's weakness. It has been a good few years for military spending, while the civil aircraft market is also in recovery mode.

The future is less certain. Civil aircraft work ought to continue to grow, the buoyant global economy should keep the electronics division strong, too. But military spending cuts are high up the agenda now in Washington, and Meggitt can only hope that fewer new planes will mean more maintenance work on older ones. That won't mitigate all of the likely decline, but means investors needn't panic. Hold.

No rush to check out of Jurys Doyle just yet

Shares in Jurys Doyle Hotel have had a strong run in the past year as investors warm to the roll-out of its native Irish hospitality around the UK.

It has been selling off 3-star hotels to focus on its Jurys Inns brand. These Inns are not hackneyed replicas of traditional Emerald Isle taverns. Rather, they are aimed at the cosmopolitan budget traveller, located in city centres, with high-quality fittings and a contemporary design. Operating costs are lower because breakfast is not included and there is no porter or room service.

Half Jurys' 34-strong estate (13 in Ireland, 17 now in the UK and the rest the US) is made up of Inns, with the rest 4-star hotels. Jurys yesterday reported a 7 per cent increase in pre-tax profits to €45m, excluding the effect of three hotel disposals.

There is further room for expansion in the UK, both in hotels and Inns. A further eight Jurys Inns will open by 2007.

A cluster of hotels in Dublin is a concern, however. Low-cost airlines have opened up other European cities as rival destinations for cheap breaks, and the Dublin hotel market is proving intensely competitive. Three of its main Dublin hotels are under review, with cost cuts planned to improve profits.

The shares trade on 17 times earnings, but given there is still growth potential, the shares are not fully booked yet. Hold.

Shire Pharma offers reward as well as risk

Shire Pharmaceuticals is one of The Independent's share tips for 2005, and it got off to a roaring start. By the end of January it had cut a deal to license in a promising new drug to treat hyperactivity in children, answering long-standing questions over what happens when its existing hyperactivity drug loses patent protection, perhaps early next year. Early sales of its new drug for kidney dialysis patients have also been very good, a reminder of the strength of the company's specialist salesforce in the US.

But. The shares are volatile and lost half their gains when Canada banned Shire's current hyperactivity drug, Adderall, which accounts for 45 per cent of group sales. The regulator in the US - Shire's most important market - is happy just with a warning that Adderall should not be given to those with weak hearts, but Shire faces a nervous wait to see if Canada's move has affected prescribing levels in the US.

There is a high chance Canada's decision can be reversed on appeal, and it is also worth betting that the relevant patent cases will drag on so that generic rivals to Adderall are kept off the market longer than conservative analysts are forecasting. There is even the possibility that Shire might fight off the challenge altogether.

Shire describes itself these days as a "pipeline company", although by its own admission it needs to buy in a high number of new drugs. Without them it may not still be growing by the end of the decade. There is often tough competition for such drugs, but at least Shire has cash of £760m.

Shire is higher-risk than most FTSE 100 companies, but its shares are worth buying.

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