Bluebird becomes an uncertain play

WHENEVER a young company with a strong growth record disappoints the City, it never ceases to amaze how the possibility of a takeover is trotted out to sustain flagging interest in the shares.

Bluebird Toys, whose shares have been among the best stock market performers of recent years, is the latest such example. Recent interim results came in below expectations, prompting analysts to cut full-year forecasts to pounds 18.5m, versus pounds 19.7m in 1994, for a prospective p/e ratio of nine.

Of most concern is the rapid decline of Mighty Max, which accounted for a quarter of group profits last year but is suffering competition from rivals such as Power Rangers. Mighty Max sales will halve this year and disappear completely by 1996. For sure, rumoured suitors such as toy giants Mattel and Hasbro may be attracted to the Polly Pocket range of miniature dolls - now an important international brand - and Bluebird's cash pile, which broker Beeson Gregory estimates to be worth 61p per share.

But the recent hot weather means shops will be sitting on more unsold stock than usual, making prospects for the crucial Christmas trading period even more uncertain than ever. The safest course is to take profits.

WHILE the recent hot weather has focused attention on sales of Boots' sun tan lotion, positive actions taken by the group over the past year or so should enhance long-term prospects.

The pounds 840m sale of the drugs division was a recognition of its failure to achieve critical mass, while management's decision to enhance shareholder value by buying back 10 per cent of the shares shows welcome restraint on the takeover front after the disastrous Ward White acquisition.

Broker Charles Stanley has pencilled in pre-tax profits of pounds 530m for the year ending next March, rising to pounds 580m in fiscal 1997. Continued involvement in the Do It All DIY retail chain is a worry, but the shares, at 581p, look a good play on any recovery in consumer spending arising from tax cuts before the next general election.

EXPECT a strong set of interim results on Thursday from specialist trade finance provider London Forfaiting. Broker BZW is forecasting a rise in pre-tax profits of more than 50 per cent to pounds 11.3m from pounds 7.3m and rates the shares a buy at 198p.

FEW fledgling technology stocks can boast a shareholder register as impressive as Virtuality's. Computer giant IBM has a 2 per cent stake, US electronics group Motorola holds 6 per cent while Dutch conglomerate Philips sits on 5 per cent.

All are after a share of the spoils that developments in virtual reality technology offer. Recent interims showed reduced losses with development costs still rising in absolute terms but down to about a fifth of total sales. The recent Philips placing raised pounds 2.4m and means Virtuality (261p) can fund current growth from existing financial resources. That, and the likelihood of small profits this year, sets Virtuality even further apart from many of its peers.

But liquidity is low with venture capital group Apax speaking for 46 per cent of the shares. Wild gyrations in share price on thin volumes are therefore likely in a sector already noted for its volatility. For traders only.

REDUCE exposure to northern supermarket chain William Morrison ahead of Thursday's interim results is the advice from NatWest.

The broker believes Morrison's future store-opening programme is being scaled back due to increased restrictions on out-of-town developments. The eight-to-10 stores earmarked for 1997 will be cut to five, of which only two have received planning permission.

This in turn will slow down an important source of sales and earnings growth, and far from the bounce back in profits envisaged earlier, a hard landing is now on the cards. Earnings growth is likely to be below market and sector averages over the next two to three years, making the 15 per cent premium, with the shares at 159p, difficult to justify.

GLASGOW-based engineer Weir gets a cautious thumbs-up from Scottish broker Bell Lawrie White after recent interim results showed a 10 per cent drop in earnings per share.

Competition remains tough in all markets but does not appear to be getting any worse, while last year's pounds 135m acquisition of pump systems group EnviroTech should ensure operating margins are maintained, pulling the overall margin level up.

Order intake looks quite healthy, averaging pounds 50m a month, though Weir is still turning away significant amounts of low-margin work. Pre-tax forecasts have been trimmed slightly to pounds 45m, after pounds 30.5m in 1994, implying a prospective p/e ratio of 15 with the shares at 251p.

The verdict north of the border is that the shares are a long-term buy but are unlikely to realise their value until further evidence of progress is seen.