Boat comes in for P&O Princess

John Laing; AstraZeneca
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P&O Princess Cruises, the world's third-largest luxury ship group, has been steering its own course since October last year, when it was spun off from P&O, the ports and logistics operator.

P&O Princess Cruises, the world's third-largest luxury ship group, has been steering its own course since October last year, when it was spun off from P&O, the ports and logistics operator. After a choppy start to its life as a separately listed firm, Princess appears to be entering calmer seas.

The group's first-quarter results, issued yesterday, showed a widely expected slump in pre-tax profits, down 64 per cent at $18.9m (£13.1m), compared with the bumper millennium year. But Peter Ratcliffe, the chief executive, said trading conditions showed a considerable improvement over the fourth quarter of 2000. An increase in passenger numbers and reduced underlying costs allowed the company to report positive earnings of 2.6 cents a share in what is traditionally the weakest time of year.

The downturn in the US economy has so far had only a limited impact on Princess's performance. The group had previously estimated that pricing in its biggest market would fall by 2 per cent in the full year because of competitive pressures. It has now revised the forecast decline to 3 per cent.

Princess is targeting a 2 per cent reduction in operating costs to help offset the effects of increased capacity and fuel costs. The group is likely to exceed those savings in the full-year, helped by today's delivery of Golden Princess ­ a new 2,600-berth vessel to serve the Caribbean. While the US still accounts for 70 per cent of pre-tax profits, the company is expanding in the UK, Germany and Australia to maximise its growth potential. Innovations to the group's product offering, such as locally tailored entertainment, more balconies and a wider choice of dining facilities, are helping Princess compete with its bigger American rivals, Carnival and Royal Caribbean.

Analysts are forecasting 2001 profits of $333m and earnings of 45.8 cents (30.8p). On that basis, Princess's shares, up 6.5p at 304p, trade on a forward price/earnings multiple of 9.9 ­ on par with the p/e of 10 for Royal Caribbean but at a discount to the p/e of 14 for Carnival. As the UK group increases its presence in its home market, appetite for the cruise stock is likely to increase. The company's cost reduction programme and further cuts in US interest rates should also buoy the price. Buy.

John Laing

John Laing appears to have learnt the lessons from its troubled past and over the last year it has been the best performing stock in the construction sector, more than doubling in value. It has reformed its ways by ditching its biggest business, the 150-year-old construction unit, in favour of steadier parts, housebuilding, property and the investment division (private finance initiative work and rail franchises).

Yesterday, in its results for the last calendar year, the problems of the past were all too evident. Pre-tax profit plummeted from £52.7m in 1999 to £5.7m last year. If that sounds very poor, remember that the figure includes a profit of £86.7m in continuing operations and a loss of £75.0m in the discontinued business.

The pure construction interests should be sold soon since Laing is in advanced talks with a preferred bidder. The construction arm has been troubled for years because it took on low-margin contracts that then went wrong, including the disastrous building of Cardiff's Millennium Stadium. It has since restructured and scaled down the business, ready for disposal. Although construction is a £1bn-a-year turnover business, it is expected to fetch just £30m.

Going forward, the company should be a less risky proposition, with more reliable earnings streams. And the City is buying the story. Over the last year, the shares have climbed from 218p to close yesterday at 525p, down 8.5p. Forecasts for the current year are tricky, but earnings forecasts seem to be around £62m, putting the stock on a forward p/e of about 12. The company has to prove, that's way too high. Take profits now.

AstraZeneca

Astrazeneca is the drugs company behind Losec, the famous ulcer treatment and the world's best-selling drug. Its shares have proved to be a safe haven throughout the market's recent turbulence, doubling in value last year. After all, recessions don't dampen demand for indigestion tablets.

Yesterday's first quarter results underlined AstraZeneca's immediate problem, the forthcoming expiry of Losec's patent. Losec sales dipped from $1.6bn (£1.1bn) to $1.5bn as the company launched Nexium, a replacement drug aimed at maintaining AstraZeneca's dominance of the anti-ulcer market. Jon Symonds, the finance director, warned of high marketing costs associated with launching Nexium and other drugs, among them some potential blockbusters. Analysts are pencilling in earnings per share of 113p in 2002, giving the stock a forward p/e of 29, a hefty premium to its US peers. The valuation is hard to stomach. AstraZeneca has a great pipeline but near-term newsflow is likely to be negative. Sell.

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