No rush to depart from First Choice

Stay out of Shire as competition hots up; Cattles' focus on quality of customers makes it a hold

Travel companies have tended to give their shareholders much the same adrenaline-crazed thrill that they give their more thrill-seeking customers on adventure holidays. Shares in travel stocks are notoriously volatile, soaring and nosediving at the slightest suggestion that there might be a glut of holidays left to sell.

Historically, too many last-minute deals have tended to mean one or other tour operator has flooded the market in an attempt to boost their market share. But in these troubled times, it is more likely to mean that a recent terrorist atrocity has put people off travelling.

For travel companies with their own rigid structures, owning all their own assets from aeroplanes to hotels, a drop in demand spells disaster: witness the near collapse of MyTravel, whose destiny lies in the hands of its bankers. But for those rare beasts that operate a flexible business model - leasing rather than owning aeroplanes and only reserving the hotel rooms they think they will actually sell - horrific scenes such as those in Madrid need not mean financial ruin.

First Choice, run by the able Peter Long, is one such tour operator, as yesterday's trading statement bears witness. Its focus on profit margins rather than market share helped it emerge from the 11 Spetember travel slump in better shape than ever. Here its strategy of building up a high-margin adventure holiday arm particularly helped. Plus its prudent approach to capacity means it can either increase or decrease the number of holidays it has left to sell on the same short notice that its customers give these days when booking a break.

The big comfort from yesterday's update was that the 20 per cent shortfall in UK bookings for this summer reported in December has been whittled down to just 6 per cent, with the trend improving by the day. Both bookings and margins on the winter breaks sold by its UK and Irish divisions are in line with last year, which means it hasn't had to flog too many ski holidays too cheaply.

That the shares fell 6p to 144.5p yesterday in response to the terrorist attacks in Spain highlights yet again their volatility, but for those investors that can stomach the ride they remain a core long-term holding.

Stay out of Shire as competition hots up

Happy Anniversary, Matt. It is a year to the day since Matt Emmens took charge at Shire Pharmaceuticals, the drug maker famous for its Adderall powder for treating hyperactive children. His arrival ended the period of uncertainty since the ousting of Rolf Stahel, and thanks to Mr Emmens' "strategic review" last summer, Shire's share price is up two-thirds.

The strategic review was misnamed. The strategy is really the same as ever, and as questionable. But the review did identify just how slow Shire has been to integrate the acquisitions that turned it into a FTSE 100 company, and finally put some impetus behind cost-cutting. The group is consolidating its 14 North American sites into four, bringing real benefits from next year. There will also be the spin out or sale of the vaccines unit, which might prove another bonus.

Shire is back to its roots as a "search and development" company. There's quite a lot in development: some 11 products will be launched between now and 2007, including the kidney drug Fosrenol this year. But none are likely to match the success of Adderall, which could lose patent protection in a couple of years. More immediately Shire will have trouble replacing lost revenues for the blood clot prevention drug Agrylin when generic rivals launch in the US in late 2004.

The trouble Shire faces is with the "search" bit of its strategy. Acquisition opportunities are few and far between and Shire is facing more rivals than ever. This is partly because of a crisis of confidence in in-house drug discovery work at Big Pharma but also because many companies want to copy the sort of strategy that Mr Stahel and others used so successfully. Shire has more than $1bn in the bank and if the company doesn't find a deal soon, there will be a clamour to give more of that back to shareholders than it promised with its modest dividend policy yesterday.

We said "hold" at 477p in August, and at 549.25p yesterday the shares price in a faith that Mr Emmens will be able to advance without setbacks. Avoid.

Cattles' focus on quality of customers makes it a hold

With concern rising about consumers' mountain of debt, being in the business of lending money, especially to those with poor credit histories, might seem unappealing.

Yet Cattles, which operates in this area, declared itself unworried yesterday that thousands of UK borrowers could be teetering on the brink of a bad debt abyss. Not our customers, says Sean Mahon, chief executive.

Despite operating in loan-shark-infested waters, Cattles has built a solid reputation for being a responsible lender. The average size of loans to Cattles' customers is less than £4,000. Also, the company does not run a credit card business - where individuals can wrack up debts with ease.

While it managed to add 44,000 new customers last year, it kept loans which went sour at an unchanged 7 per cent of its loan book. Arrears - which indicate bad debts in the future - were flat. Pre-tax profits rose 28 per cent to £123m in the 12 months to 31 December.

While Cattles still does some door-to-door lending, it is focusing now on attracting higher-earning customers with better credit histories. This group, who repay by direct debit, default less and are more economic to deal with, according to Cattles. Last year, the change in the mix of the customers kept the growth in the loan book to a modest 14 per cent - slower than in previous years. But the increasing number of higher-yielding direct debit customers helped Cattles' return on equity jump from 24 per cent to 27 per cent.

While there are obvious risks, we overplayed them when we wrote a negative piece in May 2003, since when the shares have climbed 8 per cent. Cattles has a proven track record and should boost profitability in the future. Hold.