Watch Elan from the sidelines for now

Balfour Beatty; Stanelco
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Some companies are born communicators, some strive to achieve an acceptable level of transparency. Others, such as Ireland's Elan, may have to have good corporate governance thrust upon them. In the meantime, it looks like being a second traumatic week for investors in the sprawling pharmaceuticals group, after a profit warning sent the London-listed shares down by more than a third.

Some companies are born communicators, some strive to achieve an acceptable level of transparency. Others, such as Ireland's Elan, may have to have good corporate governance thrust upon them. In the meantime, it looks like being a second traumatic week for investors in the sprawling pharmaceuticals group, after a profit warning sent the London-listed shares down by more than a third.

Plans to run costly trials to widen potential uses for new drugs, several recent product delays and marketing costs for a wave of product launches will all conspire next year to push revenues and income per share roughly 15 per cent below what the market had earlier been expecting. Unfortunate – and one more in a string of examples of how forecasts for global drug groups' earnings are no longer as secure as they once were – but hardly the crisis it appeared yesterday. The reason the shares plunged, by 835p to 1,220p, was that the management's failure to prepare the market came so soon after last week's panic over Elan's colourful accounting policies.

It has cooked up an ingenious means of boosting revenues, by setting up more than 55 joint ventures where the partner is often incentivised with a big investment cheque from Elan. The joint venture then pays Elan for a licence to one of its early-stage drug prospects and pays Elan to research for it, funnelling Elan's investment right back into the top of the Elan profit and loss account. All in accordance with US accounting principles, the company insists, and an ingenious way of spreading the risk of drug research and development work, which often fails. The trouble is analysts hate it, since they have little idea how much revenue is real cash coming in from Elan's existing products for pain, cancer, skincare and the like.

Elan shares had already nearly halved last week as the ghost of Enron stalked investors' imaginations, and they took fright at the complexity of Elan's accounts. Is it about to unravel, in a bigger, messier repeat of the collapse of Bioglan last year? No, in a word. It is sitting on a plump $2.4bn cash cushion, so there is no chance of its bankers wanting to pull away the chair. But the current crisis will need its resolution in a new era of financial openness and that could always throw up something unexpected.

Results yesterday did strip out revenues from Elan's leading drugs, including an impressive 78 per cent growth in 2001 sales of Zanaflex, for muscle spasm. Overall, turnover was up from $1.52bn to $1.86bn and net income before tax was £209m from $158m in 2000.

Although Elan is doing right in focusing on fewer bigger-selling drugs, even its reduced guidance for next year relies on astute acquisitions. So with much about the figures still to resolve, investors should watch from the sidelines for now.

Balfour Beatty

Things are back on the rails at Balfour Beatty. The shares are steaming ahead thanks to several lines of new business, smoothing the way towards full-year results next month. It made another happy staging post yesterday, named preferred bidder for a £200m contract with Thameslink, which will leave Balfour in charge of power supply renovations to improve train services through the capital. Later this week, the Government should finally give the green light to the part-privatisation of London Underground, and Balfour looks set to be in consortia covering two big chunks of the network.

The Thameslink contract proves decisions are still being made on rail infrastructure improvements, where some had feared the administration of Railtrack would cause a hiatus. It also proves Balfour's involvement in the Hatfield rail crash has not dented its chances of winning new deals.

The company has very strong links with the Government and there should be improved guidance on the timing of future projects when Balfour updates investors next month. Analysts think they are more likely to be moving their forecasts up rather than down. In the US, Balfour has a strong position in road infrastructure, keeping it busy there, while the wider construction industry may pick up if the bottom of the economic cycle really is being reached.

Before write-offs associated with acquisitions, and other exceptional costs, 2000 earnings are likely to come out at 13p, according to Deutsche Bank's estimates. That puts Balfour shares, up a penny at 212p, on 16 times, which represents good value.

Stanelco

Stanelco makes hi-tech furnaces used in the manufacture of fibre optic cable. It proved a sexy little investment during the telecoms bubble, and it could do again, but this time due to another invention: it is using its radio waves technology to bind materials for soft-gel capsules such as cod liver oil tablets. Such capsules currently have to be made using gelatine, itself made from unpalatable bits of farm animals. But Stanelco's technology will seal other materials, so its joint venture with Scherer, one of the world's biggest makers of softgel capsules, looks a winner.

Stanelco posted a 153 per cent rise in underlying profit last year, to £1.7m, but research spending and the telecoms slump will keep that flat this year. With a new broker only just on board, the shares, up 0.75p to 3.6p yesterday, could be worth tucking away.

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