Time to take profits at Wolseley

Filtronic; Pubs 'n' Bars
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The Independent Online

For a company that supplies wood to builders and pipes to plumbers, Wolseley excites a surprising amount of passion in the City. The investment professionals just cannot agree if the group's shares are a raging buy or an outright sell.

For a company that supplies wood to builders and pipes to plumbers, Wolseley excites a surprising amount of passion in the City. The investment professionals just cannot agree if the group's shares are a raging buy or an outright sell.

The usual divisions were in evidence yesterday, when the company presented a positive trading summary, revealing sales in the five months to 31 December were up 13 per cent on the same period in 2000.

Growth was sharply lower in December, though, perhaps less than 6 per cent. There is also a question over how much of the 13 per cent figure is organic growth – analysts reckon stripping out acquisitions leaves growth of 3 per cent.

More than two-thirds of Wolseley's sales are in North America, where the ongoing strength of the new housing market and consumer confidence has offset weakness in commercial building.

There are plenty of bad omens, though. The price the group is getting for lumber has collapsed in recent months to below its own internal projections. If the financial markets are right in predicting an increase in interest rates in the UK soon, the housing market here could take a tumble, too.

The sell case, in essence, is that the global economy could get worse than people expect.

The buy case is that the economy could get better. With the market expecting gloom for now and only a modest upturn in the second half, there is at least some scope for pleasant surprises. Wolseley is also performing better than its peers, with UK growth estimated in the high single figures and its North American plumbing business seeing only a modest sales decline while the market is falling at about 7 per cent.

In a fragmented US market, Wolseley's national distribution is a big plus, while with market shares of around 5 per cent the opportunities for expansion are significant. A few years ago, the share price gave more credit for that potential and a return to a price-earnings multiple of 15 would send the shares to £8, compared with 550p yesterday. Such a dramatic re-rating is unlikely, though, while future earnings are so uncertain.

The risks weigh more heavily, particularly as the stock has more than doubled since hitting a low of 260p in autumn 2000. That could tempt some big shareholders to take profits, and the private punter would be wise to cash in now, too.

Filtronic

It is often good news that prompts a company to bring forward publication of its results. Not so the telecoms equipment maker Filtronic.

While the company has already got the cash from a recent deal with BAE Systems, its auditors have instructed it to recognise the win over an extended period, not in the current year. That deal, along with another from Tyco of the US, had saved the company's loss-making Newton Aycliffe chip plant from closure last year. The delay in recognising the cash means the running costs of the plant will, contrary to earlier expectations, have a material impact on the company's year ended May 2002 results.

The bad news didn't end there since the results themselves were also weaker than most analysts' estimates. In the six months ended 30 November, Filtronic made a pre-tax loss of £4.5m on sales of £146m. At the operating level, it managed a £6.1m profit, but that was also below forecasts.

The good news was that the company generated £20m of cash in the six-month period, and reduced debt to £106m from £126m in May.

While the company is back on the right track, it still faces significant hurdles. The chip plant needs to start earning its keep to prevent it from dragging the group down and the company would do well to reduce its dependency on its top three customers. Nokia, Lucent and Motorola account for three quarters of sales.

The company will benefit from the rollout of third generation, or 3G, mobile phone networks, where it supplies key components that sit in base stations as well as the antennae for mobile phones.

The shares, which have had a phenomenal run since July, will undoubtedly perform once sentiment over 3G picks up. Yesterday's 20 per cent leap to 375p, however, leaves no room for error and little in the way of insulation from increased competition. Avoid.

Pubs 'n' Bars

Pubs 'n' Bars, which runs 66 pubs in London and the south-west of England, needs to grow. So far it has been thwarted in its ambition to reach 100 pubs, outbid by bigger rivals. It reckons this year will see the big pub landlords divesting handfuls of unwanted sites, so more opportunities should come up.

If that is the case, shareholders are likely to support a rights issue. Then the management can get to squeezing sales growth like the 6.7 per cent it managed over Christmas. The shares, up 2.5p at 44p, are a speculative buy.

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