The Investment Column: Smiths has done well - it's time to take profits

Britvic; Allergy Therapeutics
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The Independent Online

Our view: Take profits

Share price: 1,065.5p (-5p)

Smiths Group shocked the City last month when it announced the sale of its aerospace division to General Electric for $4.8bn. It promised to return £2.1bn of the £2.5bn proceeds to its shareholders and also said it was considering the creation of a joint venture which would combine its detection business with GE's homeland security operations.

The disposal makes great sense given the appreciation in the value of aerospace assets in recent years. The news sent Smiths shares soaring. They are now up nearly 30 per cent in the last six months. But, there are some risks. GE is paying in dollars for the business, which leaves Smiths shareholders exposed to any further falls in the value of the US currency. A one cent movement in the exchange rate moves the value of the deal by £12m, worth 3p on Smiths shares.

Meanwhile, the planned joint venture with GE is by no means a done deal. The tie-up would create a major force in the detection arena and is likely to be looked at very closely by competition authorities. Should plans for the joint venture fail, Smiths shares are likely to suffer in the short term. In the long-term, however, analysts believe that it could leave the company vulnerable to a break-up bid. Private equity firms have long been rumoured to be circling the conglomerate.

In comparison to the dramatic news from Smiths last month, yesterday's trading statement from the group was a rather muted affair. In fact, the performance of the company's medical division was slightly disappointing. This unsettled some analysts because the business is meant to be the most stable and predictable part of Smiths.

Given the performance of the stock, and the expectation that Smiths will deliver earnings growth below the sector average this year, now is a good time for investors to take profits. But, investors should not abandon the company altogether given its track record of delivering value.

Britvic

Our view: Hold

Share price: 300.5p (+1.75p)

The last time this column featured Britvic, the soft drinks maker had just announced a profit warning. Nevertheless, we urged investors to buy into the stock arguing that the worst was behind the company and that it was undervalued. We were right to do so.

Britvic shares have gained 35 per cent since our May tip as the company's fortunes have recovered. Yesterday, the drinks group issued a bullish trading statement at its annual general meeting. It said that total revenues had risen 4.8 per cent in the 12 weeks to 24 December amid solid growth in both fizzy and non-fizzy drinks sales. This positive trend has continued into 2007, the company said.

Analysts were particularly impressed by the recovery in carbonated drinks sales - up 2.4 per cent for the period against a 2.6 per cent decline in the market for fizzy drinks. Despite the rise in Britvic stock, now is no time for investors to be bailing out. Trading at 15 times forward earnings and yielding 3.5 per cent it is worth sticking.

Allergy Therapeutics

Our view: Buy

Share price: 127.5p (+6.5p)

Hayfever affects 15 to 20 per cent of the population of Britain alone. The allergy varies in its severity and although for some it is a mere inconvenience during the summer it can be a truly crippling application. Suffers may be unable to work, drive or go to school and those who want to prevent the symptoms need to take treatments that require up to 50 injections in a year.

Allergy Therapeutics is working on a formula that requires just four injections a year. Yesterday came news that its Pollinex Quattro (PQ) drug against hayfever caused by ragweed (the main cause of allergy in the US) has received the green light from the US Food and Drug Administration to go into late-stage clinical trials. This came hot on the heels of a similar success for the group's vaccine against hayfever caused by grass.

Both products have the potential to be blockbusters - that is generate revenues of over $1bn. Analysts expect trials of both to be complete by the end of this year and for the treatments to be on the market in 2009.

The products are already in use in Europe and have been successful in curing hayfever suffers. This makes them much more likely to be approved by the US regulators. Allergy Therapeutics is also working on a formula for hayfever caused by trees which could also find itself on the market in 2009.

Given the billion-dollar potential of each product, the biotech, valued at just over £100m at yesterday's close, looks to be a very attractive investment. Making it more so is the possibility that Allergy Therapeutics might be able to develop a tablet version of its hayfever formula, thereby doing away with the need for injections altogether. This, however, is still in its infancy and meaningful results are not expected any time soon.

Boasting a £24m cash pile and enjoying cashflows from a number of treatments it has on sale in Germany, the company is one of the less risky bets in the biotech arena and well worth backing.

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