Electrocomponents shares lose power after customers pull plug

Hip, hip hooray for Corin's artificial joints; Break-even hope gives Affinity more upside

They say the darkest hour is just before dawn. The trouble is you only know it was the darkest hour when the next one turns out to be lighter. Better to keep your head under the pillow and your money under the mattress than to try to be the earliest bird into cyclical stocks right now.

Electrocomponents is one of the companies whose sales are most closely affected by the economic cycle. It supplies a vast array of electrical bits and bobs (to be exact, 300,000 different products from hand tools and wiring to chips and power supplies) mainly to engineers. And the engineering sector is not in the best of health. As Electrocomponents admitted yesterday, many of its best customers have been made redundant.

Nobody was really surprised to read in the company's latest outlook statement that "we do not anticipate any improvement in our trading environment through the second half".

The statement cited economic figures, rather than any internal soothsaying, as the reason for its view; purchasing managers' indices have shown that the industrialists in charge of buying from companies such as Electrocomponents are still pretty gloomy about the future.

The UK, the company's major market, accounting for half of its sales and more than 60 per cent of profits, has been disappointing, as has continental Europe. Profit, before tax and goodwill, will be £46m for the six months to 30 September, it said.

Only the Asian market, particularly Japan, has been better than hoped, but this is a small, if growing, part of the business. It does show that the benefits of Electrocomponents' investment in e-commerce is paying off, with many new customers preferring to order online rather than from traditional catalogues.

Analysts will be shaving their forecasts over the coming days, as they are called in by the company, and it looks likely they will alight on a figure of between 16p and 16.5p for earnings this year. That leaves the shares, which plunged 9 per cent to 243.5p yesterday, still on a rating of 15 times earnings. At this stage in the economic cycle, it would have to be significantly below that market-average rating to be a compelling investment.

Hip, hip hooray for Corin's artificial joints

Three cheers for Corin. The maker of artificial hips and knees, up for Flotation of the Year at the techMARK dinner last night, was listed at 111p in May and has kept its head above water even as the rest of the market has slumped. Its maiden results yesterday were everything that was hoped, and its shares nudged up another ha'penny to 130.5p.

Three cheers because turnover was up 16 per cent in the six months to 30 June, as sales of its innovative hip resurfacing product, Cormet, surged in the UK. Cormet is different from the average hip replacement, which is made from metal and plastic. The trouble with these traditional hips is that the plastic wears away and the debris causes bone disease. It's not a problem in the elderly, because they don't tend to be athletic and bone diseases develop only slowly. Cormet, a metal on metal product, is designed for younger patients. A similar artificial knee is also aimed at the athletic young.

Corin is yet to launch these products in the US, the world's most lucrative healthcare market, because, despite 10 years of use elsewhere in the world, US regulators require they be tested on Americans. A launch is not due until 2006, but there was good cheer from the US yesterday, nonetheless. There were good sales of another hi-tech product for fusing together the lower back, stiffening it to prevent rubbing that causes back pain.

Three cheers, too, because Corin's acquisition of Alphanorm in Germany gives it a strong distribution network for its product in central Europe, where it is weak.

And the shares are great value at 26 times forecast full-year earnings, falling to 17 times next year. Hip, hip hooray.

Break-even hope gives Affinity more upside

Three years ago, Virgin Mobile didn't exist; yesterday it was trumpeting its two millionth customer. Virgin has set itself up as a virtual operator, sticking its brand on to services bought in from another operator, in this case T-Mobile.

Other companies with strong brands are trying to repeat the trick in other areas of telecoms and Affinity Internet is often the invisible partner. Virgin is not a customer, but Affinity works for the likes of Arsenal FC, Toys R Us and now Sainsbury's, providing mobile, fixed line and internet services to fans and customers. Unlike many caught up in the internet boom, Affinity's strategy has not changed, although its shares have been on a roller-coaster. In 2000, they touched a staggering £81; yesterday they dipped 4p to 40.5p.

Originally analysts had been expecting Affinity to turn out a £5m profit this year. Instead, and mainly because the company has failed to sign off an acquisition that would give it more customers, there'll be a small loss. While that is disappointing, it is not the end of the world. And yesterday's interim results showed sales up 141 per cent and pre-tax losses halving to £5.6m.

Affinity now reckons it will break even in the fourth quarter of the year. And Wayne Lochner, its chief executive, says the company's order book is "huge". It is also encouraging to see a new investor coming on board. Affinity raised around £1.5m through a share placing at 48.5p each, including £1m from a new, unnamed institutional investor. Directors stumped up the balance.

This column thought the share price had bottomed in March but, even though conditions remain tough, we believe there is upside from here as break-even approaches.