Buy Shire for long term

Few risks with Persimmon; Alphameric's not the safest tech play

It has been a disastrous 2002 for Shire Pharmaceuticals. The year began with a massive profits warning (the company said it may not show any earnings growth at all, although it has since managed a respectable 6 per cent). And it ended with the ousting of Rolf Stahel, the chief executive, in a row over how "North American" the company should aim to become. The shares are down more than 50 per cent.

So are they cheap enough to buy again?

The company said yesterday it has asked the US regulators to approve adult use of its hyperactivity/attention deficit drug Adderall, which has previously been allowed only for children. A decision will take well into next year, but the sooner it comes, the sooner Adderall can be marketed against a new rival, Eli Lilly's Strattera, the arrival of which has caused another lurch down for Shire shares.

Strattera is to be launched in the new year, but there are reasons for thinking the competitive threat, serious though it is for a company still heavily dependent on Adderall, may not be the end of the world. Eli Lilly's marketing machine will at least boost awareness of attention deficit disorder in adults, which should broaden the market, and Strattera has been priced considerably higher than Adderall.

There are two other big worries over Shire. The first is over Fosrenol, a kidney drug which had looked like a winner but which has been delayed as regulators fret over its safety. The second is the question of the succession, with Mr Stahel's successor not due to be appointed until the spring. Both issues are likely to be overcome over the coming year.

Which makes the shares, on a price-earnings multiple of 13 for the year just ending and 11 for 2003, look cheap. They may not perform immediately, but they are worth picking up for the long term.

Few risks with Persimmon

What happens if the housing market doesn't crash? If Nationwide is right and there is enough demand to push prices up 10 per cent next year, the investors who have aggressively sold housebuilding shares in recent months could miss out on earnings growth of a kind it will be almost impossible to find in any other sector next year.

Persimmon is the biggest housebuilder on the market, and came out with a typically bullish update yesterday: "Record profit"; "top end of market expectations"; "economies of scale bought by the Beazer acquisition" last year; "visitor levels remain firm".

Only the harsh UK planning regime has limited its growth – but of course the historically low level of new housebuilding has helped push up selling prices. Persimmon's prices have increased by about 10 per cent over the year. The price of new houses, then, is already growing more slowly than the overall market, and it has slowed to what Persimmon says is a "more sustainable level" in recent months.

Persimmon has operations nationwide, with an average selling price of less than £140,000. It has among the best margins in the industry and a good land bank. Its shares (up 21p to 399p) trade on less than 6 times this year's earnings, and there is likely to be a round of upgrades to forecasts for next year when final results are announced early next year. The housebuilding sector price-earnings multiple peaked at about 8 times in the late Eighties, and the sector is much more sustainable now. If there isn't a crash – and low interest rates mean new homes are still affordable in most areas – the sector could enjoy a strong bounce. The lowly valuation limits the risks. Buy.

Alphameric's not the safest tech play

Making a pleasant change for a software company, little Alphameric had good news to share yesterday, sending its shares soaring 12 per cent.

Results for the year to 30 November will meet forecasts and show a big improvement on last year – proving not all companies can be cutting IT budgets. Alphameric sells its software and systems to high street retailers and bookmakers – including Ladbrokes – both of which are obviously still splashing out.

Alphameric shares were up 5.5p to 52.5p. The company has reasonable visibility for the current year and reckons it already has a third of the year's sales in the bag. About a quarter of sales come from ongoing maintenance contracts.

There is a health warning, though. Revenues at its betting division are lumpy and the company is still trying to negotiate a small number of high value contracts, without which next year could yet be a sorry affair. While it is trying to reduce its dependence on this type of deal by getting more of the smaller value contracts, the risks remain high until it gets the balance right.

Analysts expect profits of £9.5m for the year to 30 November rising to £11m in this new financial year, making earnings of 6.3p and 7.3p. That puts the stock on a forward rating of about 7 times, which does not seem particularly demanding even after the sharp rise in the shares yesterday. But given the lumpiness of orders, there are safer ways to get exposure to any technology recovery.