Bottom Line: Pilkington shows potential

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The Independent Online
PILKINGTON'S share price has defied the doubters by handsomely outperforming the stock market this year despite sporting a rating that seemed to discount any conceivable good news about future recovery.

Back in the heady late Eighties the company managed to earn margins of 13 per cent at the peak. Such trading conditions are unlikely to return.

But the group is confident that it can eventually get back to margins of 10 per cent or more against the present 3.6 per cent. The question is when. But if it can do so over a reasonable period the current rating is not as demanding as it appears.

Signs of what can be achieved are evident in the 1993-94 results. Pre-tax profits, including a pounds 30m turnround on exceptional items, jumped from pounds 41m to pounds 98m.

Within this, US trading profits soared from pounds 5m to pounds 26.8m on a 10 per cent increase in sales, illustrating the operational gearing available in Europe when recovery gets fully into its stride.

US prices rose last year as capacity utilisation reached 95 per cent. Pilkington suffered from a 10 per cent price fall in Germany but enjoyed post-devaluation volume gains in the UK and has secured a solid 5 per cent price rise in February. Brazil and Argentina are powering away.

Hefty job cuts - 1,700 last year and another 1,350 this - are boosting operational gearing while financial gearing is easing ahead of target even with the deferment of the Australian flotation.

As prices and volume improve in Europe and continue to rise in the US, all with the help of a shift towards higher value-added new products, pre-tax profits of more than pounds 250m in three years are feasible. A price/earnings ratio of 11 even that far ahead is not outrageous and renewed dividend growth from the current 4p base is not at odds with a 3 per cent yield.