Weak sales figures make EMI one to avoid

Little reason to buy nCipher; Wait for better news at Clean Diesel

Can the new Coldplay album shift EMI shares? What about the new one from Atomic Kitten? Or Phil Collins? Is EMI's autumn release schedule exciting enough to get the record label's shares back up the stock market charts?

They have all got to be monster hits, because EMI has promised to win market share from its bigger rivals this year. But even a decent chart performance might not be enough to save this historic company from long-term decline.

EMI shares have fallen by 40 per cent since this column advised selling them back in January, but the trading environment has got even worse since then. The share price collapse has accelerated in recent days since wholesale figures released by the British Phonographic Industry on Monday suggested that EMI's home market, which has sometimes seemed resistant to the downward global trend, has hit the skids. UK retailers bought in £215.3m of music in the three months to end-June, down 15 per cent on the previous year.

The World Cup had the effect of dampening demand, as it did across the high street, but there is no guarantee sales will snap back in July, as consumer confidence remains fragile. Long-term, the growth of CD burners and internet downloads mean that sales of recorded music are likely to fall substantially, as they have in the US, particularly as broadband internet access becomes more widely available.

EMI's fans argue investors need to focus not on sales growth but on the cost cuts that Alain Levy, the head of recorded music, is pushing through. These are not insubstantial, yielding annual savings of £65m, but restructuring costs money and the effect on margins remains vague.

The worry is that the effect of cost cuts on profits will be muted if sales are sliding (that is, if EMI fails to meet its promise of flat revenues this year). Other companies, such as Sony, BMG and the market leader Universal, which have greater market shares than EMI, are certain to respond by spending more on developing new artists, and EMI knows it has to do the same.

Even if all goes to plan, EMI shares trade on a multiple of current year earnings of 16 times, falling to 13 the year after. That still looks toppy for a company with dim long-term prospects. Avoid.

Little reason to buy nCipher

Unlike some other technology firms, at least the computer security company nCipher is not in any imminent danger of going bust. At the current rate at which it is burning through its pile of cash, the company could survive another 25 years of losses.

But, so what? That is hardly reason to invest in a business where trading is getting worse. The company makes computer components to keep hard-drive contents secure, and is predicting another stormy six months.

NCipher's sales in the first half of the year were in line with its July warning but, at £6m, were still down 26 per cent from the same period last year and 3 per cent below the previous six months. Trading was toughest in the US where sales plunged 30 per cent.

The group has slashed spending on marketing and cut staff levels to 156 from a peak of about 180. Interim losses were £4.8m, compared with £4.4m in the first half of last year. Rather than wait for markets to pick up, surely the company's management team should be spending more time considering ways to boost the business, rather than just sitting there trimming costs? The chief executive, Alex van Someren, says he is always eyeing acquisitions, but is unconvinced the cost of technologies in the security arena have yet bottomed. He can afford to be much more adventurous.

It might look tempting to buy shares in nCipher given the company's current market capitalisation of £65m is so far below its £101m cash pile. But the valuation suggests the market does not believe there is much of a growth story here. Analysts predict sales of only about £12m this year and don't see the company breaking even until the end of 2004 at the very earliest.

Until nCipher's management team exercise their imagination and come up with a credible strategy – or until an outsider does it for them – there seems little reason to buy the stock.

Wait for better news at Clean Diesel

Clean diesel Technologies garnered quite a following when it listed on AIM in December. The Connecticut-based company is developing new ways of cutting emissions from diesel vehicles.

It is a highly risky investment proposition, but potentially a highly rewarding one.

The company's main product is made from platinum and is mixed with diesel to help reduce "particulates", the cancer-causing particles that make up black exhaust smoke.

In the US, where diesel is only really used by commercial vehicles, CDT is trialling the Platinum Plus product with some of the country's largest commercial fleets. The trials are going more slowly than had been hoped, but the results, in terms of improved miles-per-gallon and lower emissions, are encouraging.

CDT is also make progress with a second product to reduce nitrogen oxide emissions, an issue of growing importance in Europe.

The shares are thinly traded and liable to lurch about on pieces of good or bad news. They were off 17 per cent at 97.5p yesterday after the news of delays to the Platinum Plus trials and to the timetable for the product's regulatory approval. The company said it made a $1.5m (£1m) loss in the first half of the year.

CDT raised £3m when it came to AIM and has enough cash to take it through to spring next year. The company may pull off a licensing deal to raise more money, but there is a strong chance it will tap shareholders for more cash. That could hamper the share price, but a regulatory breakthrough or news from the trials with well-known US companies could just as easily push the shares higher. The stock is one to watch.