No free lunch at cruising easyJet

Enodis looks fair but lacks excitement; GWR moving along the right wavelength
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After a steep ascent and all the turbulence getting through the clouds, Captain Webster has turned off the seatbelt sign and told everyone to settle in at cruising altitude. No one will be wheeling out the in-flight snacks, though, as this is easyJet, orange standard bearer of the no-frills revolution.

Ray Webster, the chief executive, admits so much time has been spent on expanding the number of routes easyJet flies and boosting its fleet that profitability has slipped too far down the agenda.

The company, which bought up smaller rival Go last July, said capacity would grow no more than a fifth next year - a healthy increment for many industries but positively sluggish by the mushroom standards of the low-cost carriers. Management will hunker down to making the company "slicker" - for example by shaving a few minutes off the turnaround of aircraft at airports and shifting staff to hubs where they are most needed. It may not be dramatic, but in a business where competition is fierce, every pound counts.

One-offs associated with the integration of Go (and the decision not acquire Deutsche BA) took a chunk out of profits, which were down 28 per cent to £52m in the year to 30 September. Four old Go planes were sold at less than the value at which they appeared on the books, knocking an unexpected £10.2m from the bottom line.

But the results for the year overall masked strong growth in the second half. One of the key issues for low-cost airlines is whether they are able to raise prices of flights. EasyJet said its average fare, or yield, had fallen 6.7 per cent to £43.28. A 10.7 per cent drop in the first half improved to being just 1.2 per cent down in the second half. By the end of the year, ticket prices were rising again.

The worst may be over, but this remains a highly competitive market. EasyJet has the added challenge of introducing a second make of plane, and the drip-drip of its founder's shares on to the market to worry investors. On 14 times earnings, the stock is a hold at best.

Enodis looks fair but lacks excitement

Enodis is the silly name for a company that touches many of our lives. It makes the ovens that cook burgers and sandwiches at chains such as McDonald's, Starbucks and Pret A Manger. Its fridges are used in supermarkets across the world.

The company racked up too much debt just as economic uncertainty prompted many restaurants to cut spending on new kitchen equipment.

Enodis crawled back into the black in the year ended September, posting a £15.9m profit despite falling sales, thanks to an extensive cost-cutting campaign. There was also much reduced debt of £140m, and the hope is Enodis can shave £20m more in the next year. Interest cover is heading the right way, but is still rather tight.

Enodis must cut yet more costs just to stand still. Spending freezes by the fast food giants and price pressure in US supermarket fridges will stunt sales growth again next year.

We have long been negative on Enodis shares and last wrote about them in March after the latest profit warning. They lost a third of their value in the following months, but the new chief executive's efforts have been rewarded with a strong rebound. Up 1.25p to 84p yesterday, they now trade on 11 times next year's likely earnings, which looks fair rather than cheap, and there is no dividend. Unexciting.

GWR moving along the right wavelength

GWR, the owner of Classic FM and a host of local stations, is emerging as a key player in the future of the UK radio industry. It looks pivotal in two areas: industry consolidation and the emergence of digital radio.

Consolidation has long been elusive, and disagreements over valuations combine with regulatory uncertainty to suggest it may only happen in the long-term. Recent competition rulings suggest the biggest players will be unable to merge, leaving GWR the most likely takeover candidate.

Digital radio is a medium-term growth business, with the number of digital sets predicted to reach a million by 2005. GWR controls the national "digital multiplex", a sort of landlord on the broadcasting spectrum to which radio stations pay rent linked to their sales and listener figures. It is already profitable. The company also has digital stations ranging over pop, rock and classical music, and is ploughing a third of profits back into digital.

In the short term, though, the driver is going to remain the advertising market, on which there was great news yesterday. Across the group, revenues are expected to be up 12 per cent in the final quarter of the year, partly thanks to better selling methods but mainly because of gathering economic confidence from advertisers. The stock, at 258.5p, should grow into its multiple of 25 times next year's earnings. Hold.

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