Bottom Line: Peering through a glass darkly

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The Independent Online
PILKINGTON'S shares have doubled in a year as the stock market chose to peer through a glass darkly at the long-term prospects for the company.

On the basis of even the most optimistic forecast of this year's earnings, the shares now trade on a prospective p/e of 84. Even if high expectations for the company's operational gearing prove well founded and profits double next year, the multiple (after a lower tax hit) will still be in the twenties 18 months out.

It is not easy to balance that optimism with the tenor of Sir Anthony Pilkington's downbeat comments yesterday and the discouraging evidence he provided of price and sales trends in Europe, the company's biggest market.

Germany (half of European sales and therefore a quarter of the whole company's business) is being squeezed on two fronts. Slumping car sales mean automotive glass prices are 10 per cent lower than three years ago. Overcapacity means that even the extra demand following unification has not been enough to keep prices from falling on the architectural side.

Other worries include the persistently high level of Pilkington's debt, which necessitated the sale recently of Sola, one of its best businesses. A target of 50 per cent gearing within two years is likely to prove demanding without substantial further assets sales or a sharp reversal in cash outflow.

Bears could also focus on declining royalty income from the company's patent on the float glass process and the questionable quality of earnings from Brazil and Argentina which, together with Australia, provided almost half the first half's operating profits. .

The dividend is unlikely to be raised until 1996 at the earliest and in the meantime provides an unexciting income of under 3 per cent.

Set against those concerns is the undoubted recovery becoming evident in the US and, less so, in the UK. Cost-cutting is finally having the desired effect on productivity and the tax charge is coming down.

When capacity utilisation improves, profits at Pilkington will follow suit dramatically. That prospect, however, is still a way off and more than discounted in the share price.

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