Premier Farnell is one to avoid

Collins Stewart; Management Consulting

A year ago, Premier Farnell, the electronics distributor, introduced a hiring freeze across its European operations. The move drew criticism at the time, since Europe had just seen a record sales month and economists believed the Continent would escape most of the ravages of the US downturn. But Premier Farnell was right.

Its efforts to slash costs throughout 2001 were among the fastest and most effective in the industrial sectors. So it was bye bye to 500 staff, more than 10 per cent of the group total, but credit from the City for keeping the group in the black.

Before tax, goodwill and losses on business disposals, profits last year were £72.5m, down from £102m in 2000. Sales fell almost 8 per cent to £806.4m. That's not bad, since the group has more than half its business in the US, and since, for the first time in decades, a downturn in the electronics industry has coincided with a wider cyclical trough.

Premier Farnell supplies all manner of electronic bits and bobs, specialising in small orders, delivered in double quick time. Its sales are impossible to predict with any certainty from one day to the next, but the cost-cutting does mean future increases will feed very quickly down to the bottom line.

In the meanwhile, Premier Farnell is investing in improving service levels. It is focusing on its biggest customers, taking over as much of their electronics stocking needs as can be outsourced. And it has developed its own online procurement software which it is rolling out slowly, customer by customer. This way lies the return to strong margins.

But despite these moves, it is tough to view Premier Farnell as anything other than a punt on economic recovery. Too many investors have already placed their bets, and the shares have raced back to the levels of a year ago, and were up 18p more to 339p yesterday. John Hirst, chief executive, has proved he has a nose for the prevailing economic wind, and he is not sniffing anything as racy as an economic upturn. The talk yesterday was only of "stabilising" markets, and the rate of decline certainly slowed in the fourth quarter of the group's financial year.

With the shares trading on 31 times forecasts of this year's earnings, buying in would require a lot of faith in a speedy sales rebound. Avoid.

Collins Stewart

The Square Mile may be suffering one of its worst recessions in living memory, but that hasn't quashed the expansion plans hatched by Terry Smith for his investment banking boutique Collins Stewart. Mr Smith floated the company in 2000 after leading a management buyout from Singer & Friedlander, and he has been investing aggressively to exploit its reputation for objective investment research. Mr Smith says investors who would usually deal with the big Wall Street firms nowadays prefer to strike up a relationship with a smaller bank like Collins Stewart.

He readily admits that if we see another bull market then worries about the independence of Wall Street research will quickly evaporate. So he's capitalising on the window of opportunity. Staff numbers rose by 132 to 385 last year, although with the company tying staff bonuses to revenues the total wage bill rose only 6 per cent. Mr Smith is also on the lookout for an asset management business to bring greater visibility to revenues.

Apart from new offices in London and New York, he has little to show for the investment so far. The push has coincided with doggedly tough markets that saw revenues from continuing operations rise just £400,000 to £100m last year. Small wonder operating profits fell 11 per cent, to £32.9m.

Payback time is anyone's guess. HSBC, the house broker, became less optimistic yesterday, forecasting zero growth in Collins Stewart's operating profits during 2002. All that's certain for now is that with no end to the City recession in sight there must be a danger that the company disappoints expectations in the short term. The shares, down 12.5p at 426.5p, are only for the brave.

Management Consulting

Proudfoot became something of a by-word for botched acquisitions and stock market underperformance, so the management consulting group changed its name in 1999 to, er, The Management Consulting Group and, more importantly, changed its management. The consultants who came in from KPMG to advise on recovery now run the company, and things look to be on track.

Having shaken up the overseas businesses and concentrated on hiring better staff, the group's like-for-like turnover was up 34 per cent last year, as it advised on corporate downsizing. With break-even passed in the second half, the shares, up 7.25p to 70.25p, are a buy.