On a balance of risk Dixons looks too expensive

Passengers up but easyJet still in turbulence; Best to steer clear of Xenova despite drug options

There is a bit of a scrap on between the bulls and the bears over Dixons, the UK's biggest electrical goods retailer.

There are those who reckon the latest generation of digital products, including cameras and DVDs, will spur sales growth for some time to come. And there are those who fret that a dip in consumer confidence will push Dixons into a downward spiral of missed profit forecasts and sliding profit margins. Who has the more convincing case?

The bulls have come away from meetings with the company reassured. Dixons said yesterday that management will meet analysts over the coming days and that it remains confident it can deliver a full-year trading performance in line with market expectations. There has been a welcome recovery in sales of home computers (through the PC World chain) and pre-pay mobiles, and there could be something of a relief rally as it becomes clear analysts are not shaving their forecasts.

The bears, though, are looking to the medium term. Dresdner Kleinwort Wasserstein did an interesting analysis this week which suggested product cycles are irrelevant to Dixons' performance; as DVD sales have jumped, so video and hi-fi sales have fallen. The main driver is consumer confidence. And with consumer spending at risk from a faltering economy, now is no time to buy shares in a company whose main products are big-ticket luxuries.

In fact, Dixons' performance even through a retail boom has been lacklustre, and the most recent set of results were disappointing even though they were flattered by gains from the sale of property.

On top of this, the Competition Commission continues to eye what some see as the excessive profits Dixons makes from pushing extended warranties to its customers. And there is the risk it could overpay if its decides to bid for Darty, currently owned by Kingfisher, in its ambition to bolster its modest European presence. On a balance of risk, Dixons' 186.25p share price, which puts it on 15 times this year's earnings, looks too high. Sell.

Passengers up but easyJet still in turbulence

British Airways would have you believe that low-cost air travel doesn't have to be no-frills travel. In the battle for the European skies, its "cheap frills" alternative could be a big threat to the likes of easyJet.

Turbulence is part of life for any airline investor but for easyJet, the orange beacon of the low-cost skies, the past few months have been particularly bumpy. The seat-belt lights came on in April when the ebullient Stelios Haji-Ioannou announced he was stepping down as chairman. Since then there have been a number of bizarre decisions from the cockpit. The acquisition of Go was followed by an option to buy Deutsche BA. And easyJet abandoned the main tenet of its business plan by supplementing its Boeing fleet with Airbus planes. That means fewer economies of scale in maintenance and spares.

Traffic statistics for October showed that, on this measure, easyJet is still gaining altitude. The airline carried 1.63 million passengers – a 43 per cent increase – and the proportion of seats filled on the average flight rose to 83.3 per cent from 82.2 per cent.

So far, there is little sign passengers have been deterred by the barrage of bad publicity caused by a series of cancelled flights in the summer, which prompted speculation the airline was struggling to integrate Go. But the group, which reports full-year results later this month, has plenty more work to convince the market that the success of low-cost airlines is not merely a fad. The shares, down 12p at 342.5p, look too risky. Avoid.

Best to steer clear of Xenova despite drug options

There is something akin to despair in the UK biotech sector. Most little companies are years away from getting products on the market, and cash is running out fast. It is difficult to see many surviving, but Xenova at least has options.

The cancer specialist is in the last phase of trials of Tariquidar, a pill to increase the effectiveness of other drugs for lung cancer. If that yields data strong enough to persuade regulators it is safe and effective, it could be on the market with worldwide sales estimated at £160m. But launch is not going to be until 2005.

The attractions of Tariquidar and the other Xenova drugs are such that the company can raise extra cash from licensing them to bigger pharmaceuticals groups. In particular, global marketing rights to new vaccines against cocaine and nicotine addiction, plus the European rights to Tariquidar, are all up for grabs.

Xenova managed a small rights issue last month, but will need a big licensing deal soon if it is to avoid a cash crunch. It is 18 months until the money runs out, and you can be sure potential licensees will spot this and put the thumbscrews on in talks. Xenova is one of the stronger in the small-cap biotech sector, but that's not saying much at all. Avoid.