Matalan is best left on the shelf for now

Egg still has plenty to prove in its home market; A nailbiting time for beleaguered FKI

With his Geordie accent and tendency to speak in business school gobbledegook, Matalan's chief executive, Paul Mason, can sometimes sound like Paul Gascoigne reading a management text book. But his methodical approach, brought with him from Asda, has started to pay dividends.

Half-year profits are up, underlying sales are better than feared and the group has started addressing the serious problems which saw its growth outpace its investment in system and infrastructure.

He's not a miracle worker, though, as yesterday's share price swings showed. Matalan shares jumped 37p in early trading as the City pounced on underlying sales growth of 8.9 per cent in the past seven weeks. But when analysts got to see the whites of Mr Mason's eyes they were reminded that these figures were achieved against weak comparisons last year and that sales growth should settle down to 4 per cent. The shares eventually finished down 6p at 189p

Mr Mason is trying hard to get the retail basics right. Nearly £30m was spent on IT systems in the first half. He has improved stock control and reduced lead times from suppliers. More needs to be done on availability, which is still poor in some stores. In the next year, Matalan will copy Wal-Mart's Asda in stripping out peripheral ranges so it can buy in greater volumes of the rest. Mr Mason wants to raise the average basket size from £20 but still to offer the lowest prices around on staple products such as jeans and T-shirts.

So why are the shares still trading on a price-earnings multiple of just 10? The answer is that Mr Mason himself admits he is only six months into a two-year turnaround programme and there are risks aplenty. Costs rose faster than sales in the half. There were more staff in the shops and property overheads increased as the group sought bigger stores. More rent reviews are also coming up. All this means investors should tread warily. Improvements at M&S, Arcadia and Bhs have brought shoppers back to the high street and left Matalan's standalone stores looking somewhat remote. And Asda looks like a fearsome competitor to Matalan in clothing these days.

So far so good, then, but the shares should be left on the shelves for now.

Egg still has plenty to prove in its home market

Egg believes it has got the internet banking game cracked. The business boasts nearly 2.5 million customers – five times that of its nearest rival, Smile – and took 5 per cent of all new credit card balances this year.

Yesterday Egg, which is still 79 per cent owned by its founder Prudential, reported an overall loss of £5.1m for the three months to 30 September, but said its UK business turned in a profit of £9.4m for the period. That was higher than most expectations and up from its £78m loss at the same time last year. Egg's shares rose 4 per cent to 132p.

The bank has addressed criticisms that it is merely a credit provider. It is surging ahead in personal loans by offering attractive introductory deals, helping to add 107,000 new customers in the third quarter. Mortgages also make up 50 per cent of its business. Paul Gratton, Egg's well-respected chief executive, is now eyeing other markets, and will launch the bank in France next week. This move is likely to be the thin end of the wedge, as Egg argues it wants to expand by attracting more ABC1s in other countries rather than the less well off here.

Yet the company still has plenty to prove about its long-term growth prospects in its home market. Growth in its credit card business appears to be slowing due to increased competition from rivals. Egg has also yet to prove it can retain its personal loans customers after the introductory period. If customers jump ship, Egg will have taken a serious dent in its margin in recent months for nothing.

Egg reported a profit in the first quarter of this year but shareholders will have a long wait for it to return to the black now it has planned an acquisition spree. Losses of £19m are being forecast for this year.

Egg's shares have gone all over the place in the past two years. The company is expensively priced compared with US credit card providers – which have a similar business mix – and it is currently trading below its float price in June 2000. Avoid.

A nailbiting time for beleaguered FKI

FKI is walking a tightrope in an economic gale, and while the engineering group's management is pretty confident it isn't going to fall off, the City is fearing a horrible accident.

FKI is burdened with £500m of debt, more than its market value and a little too much for comfort. Cash flow has to cover interest payments of at least 3.25 times or it will breach promises to the bank; on its broker's forecasts it will have them covered just 3.5 times this year.

The dividend, too, is barely covered and a yield of 15 per cent shows the market clearly reckons it will be cut. The new chief executive, Paul Heiden, will probably wield the axe when he moves in at New Year.

Meanwhile, the chilly winds of economic slowdown appear to be whipping up again. Economic forecasts suggest deteriorating confidence and the sort of curbs on capital expenditure that will hit FKI particularly hard because its diverse product portfolio spans lifting gear and electric motors to handles and hinges.

FKI shares jumped 7.5p to 74p yesterday after the group dispelled some of the more fevered recent rumours with a robust trading update. Best of all, it showed cash flows had been positive in the first half of the financial year, going part-way to restoring management's reputation for strong cash management and FKI's position as one of the highest-margin businesses in the sector. There was also good news on the growing order book and a prediction that the second half of the year will be no worse than flat.

But the company is not out of the woods yet, and the bears could still have plenty on which to feast. Even on a lowly 7 times this year's earnings, the stock is not worth pursuing.