Brave the turbulence to buy into Smith Group

Barratt looks as safe as houses; Alizyme nap proves a 377% winner
Click to follow
The Independent Online

There are still some 2,500 commercial aircraft sitting idle in the New Mexico desert. There is going to have to be a pretty strong upturn in air travel before airlines find themselves having to order replacement planes, and Smiths Group - which makes engine parts, electronics and propellers, among other components for the industry - sounded a cautious note yesterday, warning it did not expect an upturn until 2006, a year later than most forecasters.

Military aircraft spending in the US is strong, but the aerospace division, its biggest, saw operating profit fall 24 per cent overall in the year to July. Trading was also tough in its economically cyclical engineering unit. Which makes the company's results yesterday pretty impressive, considering. It weathered a decline in the dollar, and a slide in the value of its pension pot, with just a 3 per cent decline in pre-tax profits, before goodwill and one-offs. A small rise in the dividend gives the stock a yield just below 4 per cent.

Smiths is spotlighting two relatively new areas: what it calls "detection" (mainly security systems for airports and other bomb or bioterrorist targets) and its medical devices division. Detection is, of course, a hot area. Smiths has won some big contracts, including one to install anthrax sensors for the US postal service, and while the timing of future sales is difficult to predict, there seems little reason to expect growth will slow. Both divisions are likely to be bulked up through new acquisitions, and Smiths has at least £1.5bn that it can spend. Though it blotted its copybook with the deal to buy TI Group in 2000, the company has a relatively good record in merger and acquisition activity.

Investors looking for plays on an economic recovery have left Smiths to one side over the past few months, rightly perceiving recent disposals to have reduced its cyclical exposure. But this short-term underperformance should not deter investors from taking the longer view and buying in.

Barratt looks as safe as houses

A Barratt home may still not be the most fashionable address in the street but for investors the house builder has been a real des res for more than a decade.

Since 1992, Barratt Developments' earnings per share have increased by an average of more than 20 per cent a year. Again yesterday, the 31 per cent increase in pre-tax profits for the year to 30 June - to £288.7m -was above forecasts and sent the shares up 11p to 520p.

Bigger does seem to be better in this industry. The time and expense of the planning process, in particular, is squeezing smaller, less flexible players out of the market and forcing consolidation, although Barratt still plans to pursue a policy of organic growth.

Bigger margins and faster turnaround times have also seen the company improve its return on capital employed from 31 per cent to 34 per cent in the last year, maintaining its position as one of the best in the industry.

Concerns over the possibility of interest rate rises has made investors in the housebuilding sector especially jumpy over the past few months. But this should be tempered by the continuing chasm between housing demand and supply, currently an estimated deficit of 75,000 homes a year.

Barratt's price-earnings ratio is at the lower end of the sector at just over 5 times, yet all in all the company remains a solid growth machine. Safe as houses, in fact. Buy.

Alizyme nap proves a 377% winner

Shareholders in Alizyme who took our advice and took part in the open offer at 28p in January have an extraordinary 377 per cent profit on their cash. The little biotech company's stock is up two-thirds in just the past week.

It is still all going right for the company. Yesterday it said Renzapride, a treatment for irritable bowel syndrome, was safe and effective as a treatment for sufferers of the disease who experience both diarrhoea and constipation. About one in five Westerners suffers from the disease.

The news comes on top of recent announcements of strong data from trials of its obesity drug, and a licensing deal covering that product in Japan. Alizyme now has three products ready for the last phase of human trials and looks likely to become one of the rare European biotechs to have successfully developed and launched a drug.

That said, the next major news may not be until the middle of next year, when it licenses one or more of the three drugs. Since the shares of loss-making biotech companies move on news rather than financial results, there is likely to be some short-term pressure from profit takers. But the success and strength of this company is worth backing for the long-term. Hold.

Comments