Hold on to Autonomy for the software upturn

Put a lock on Halma; I Feel Good must get better
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The Independent Online

Autonomy, in common with everything in the software sector, has switched from stock market darling to dog. The barking mad days of 2000 when its shares were worth more than £40 are long gone, but the business remains intact, cash generative, profitable – a proper business.

There were more warm words yesterday from Mike Lynch, the physics boffin behind the company, when he presented investors with results for the first three months of the year. He increasingly looks to have been right when, almost six months ago, he said the downturn in the software market had bottomed.

Yesterday, he unveiled a 4 per cent quarter-on-quarter rise in sales, to $14.1m, and a 57 per cent rise in pre-tax profits, to $4.2m.

Sales are still 4 per cent lower than the same period a year ago, though, and the rebound from the September lows has slowed substantially. Sceptics suggest that it could be a long, hard slog back to the levels seen at their peak. But the software – which mimics the human brain to sort company information contained in a morass of e-mails, documents and now phone calls – has picked up some big new clients, and there was good news on selling prices, which have held steady. It is also being worked into the bigger software packages being offered by the likes of IBM.

Autonomy is highly geared to the business cycle and, just as sales collapsed with corporate spending, they could show a speedy recovery as confidence returns.

That is just as well because Autonomy shares, every which way you measure them, are looking on the expensive side. Even optimistic analysts have the shares trading on 25 times annual earnings not expected to be reached until 2004. So it will take a return to substantial growth before forecasts of future earnings catch up with the valuation. That said, the momentum is upwards and the shares are worth holding.

Put a lock on Halma

As the world's leading maker of safety products, Halma has built itself quite a reputation for reliability. Its stock consistently trades at a premium to its sector peers and investors like to feel that their trust is rewarded.

Which is why yesterday's warning that profits would miss forecasts – albeit only by a few per cent – came as such a disappointment. It was the second caution in six months.

Halma, which makes an array of safety products, from fire and gas detectors to water testing kits and safety mechanisms in lifts, is finding that demand in the US is weaker than it bargained. The US accounts for a third of sales, so group margins, around 17 per cent net across its operating companies, are under pressure.

The good news is that spending on safety products is not discretionary and orders are often placed at the behest of government regulation. This gives the business an enviable robustness that has helped it clock up 15 per cent-plus dividend growth rate for the past 23 years. It also gives it high levels of cash flow.

To back up its market-leading positions around the world, Halma has been boosting its research and development spending on new inventions. It also promises to go back on the acquisition trail in its next financial year.

The breadth of Halma's portfolio and its geographical reach provides a cushion from weakness in any one country, even the important US. Hence analysts have only pulled pre-tax profits forecasts back slightly for the full year to 30 March to £49m from £51m. This means the shares, down 5.5p to 151p, trade on a price/earnings ratio of around 16 times. Hold.

I Feel Good must get better

Veteran men's magazine editor James Brown promises "lions instead of lager" from his new venture Jack, which hit the shops yesterday. I Feel Good, his publishing company, is gambling that "an orgy of war, animals, fashion, genius and cool", as promised on the cover, will find its niche in a lads' mag market dominated by Mr Brown's former haunts Loaded and GQ.

Jack has its work cut out. If it is the dog of an idea that IFG's inaugural magazine launch Hotdog was, then the group has no chance of meeting its broker's forecasts of breaking even in 2003 and reporting a profit in 2004.

Knocked off course by Hotdog, which was sold last year, IFG made a pre-tax loss of £1.4m in the year to 31 December, down from £1.8m in 2000. Turnover rose to £4.2m from £0.7m. The group owns a few other men's lifestyle and leisure titles including the comic Viz where it has had limited success at driving dwindling circulation. Its plans for the comic, as well as updating its jaded image, include chasing merchandising deals.

While Jack already has impressed with its top drawer advertisements, the market remains tough. With so many uncertainties in the group's outlook, and its poor stock market track record, investors might get more for their money by buying the magazine, not the shares.

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