The Investment Column: Soaring Wolfson looks chipper

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The Independent Online

It seems Wolfson Microelectronics cannot put a foot wrong these days. Yesterday's full-year results from the chip maker easily beat City forecasts. It delivered a 40 per cent rise in 2005 sales, to $166m (£94m), and a mighty 156 per cent jump in pre-tax profits to $38m.

Wolfson designs, makes and sells microchips which go inside consumer electronic devices. If you have an iPod, a Sony PlayStation Portable or a TomTom satellite navigation system you are enjoying the benefits of Wolfson's technology. The company was spun out of research at Edinburgh University more than 20 years ago and boasts an awesome growth record. Since 2001 alone it has grown its revenues 10 times.

However, things have really started to take off since the group's float in October 2003. In this period, its shares have doubled thanks to soaraway demand for the latest electronic gizmos. The company believes this demand will remain strong in 2006 and tipped its sales to be given an extra boost by the growing number of microchips it has on offer. Presently, it supplies all major consumer electronics manufacturers and has a portfolio of 90 products.

Although Wolfson enjoys a cash pile of $65m and continues to accumulate cash on its balance sheet at quite a rate, it has no plans to pay a dividend. For now, it intends to plough these resources into research and development to maintain its competitive edge. Given the industry it operates in, this is key. The company's major competitors include giants such as Texas Instruments and Cirrus Logic. With US corporations like these breathing down its neck while at the same time having to please customers such as Microsoft, Apple and Hewlett Packard, it certainly needs to be at the top of its game.

City analysts expect profits at Wolfson to rise by about a quarter to $48m in 2006. At yesterday's closing price, this leaves the stock trading at 21 times forward earnings. That is quite a discount to its peers, most of which are listed on Wall Street. Investors should hold on to Wolfson for further gains.

Chemring gains as US military expands

Shares in Chemring have more than doubled since this column tipped them in 2004 as the defence group has cashed in on recording military spending by the US government. It is estimated that the Bush administration's defence budget stands at £230bn a year, and of this total £80bn goes to companies such as Chemring which provide the US with the latest hardware.

Judging by yesterday's annual results, the group is doing rather a good job of winning a piece of the action. Chemring reported a 27 per cent rise in earnings and boasted that its order book stood at a record £160m, up 66 per cent on the year. To bolster its US operations it has spent £40m on acquiring Technical Ordnance, a Minnesota-based explosives manufacturer.

Chemring's most popular suite of products help prevent military aircraft being shot down. And with the US armed forces conducting operations in Iraq, Afghanistan, Haiti and Kosovo, demand for them is unlikely to dry up any time soon.

The only blot on Chemring's copybook yesterday was the £2.5m loss delivered by its marine electronics business. But investors should not be worried by this. The unit accounts for less than 10 per cent of total revenues and is earmarked for disposal.

Meanwhile, given Chemring's record order book and the buoyant market conditions it enjoys, its shares should continue their march higher in 2006.

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