Wood Group should be avoided for now

Take a nibble at Greggs; Vardy is only for reckless drivers
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The Independent Online

One of Scotland's wealthiest families, the Woods, have had a harsh introduction to the London stock market. The oil services group they floated last June has seen its shares fall more than a fifth, and there has been a hellraising couple of days this week as the stock first plunged on misplaced rumours of a profit warning and then rebounded in relief yesterday.

One of Scotland's wealthiest families, the Woods, have had a harsh introduction to the London stock market. The oil services group they floated last June has seen its shares fall more than a fifth, and there has been a hellraising couple of days this week as the stock first plunged on misplaced rumours of a profit warning and then rebounded in relief yesterday.

John Wood Group – which carries out rig design, project management, well maintenance and the like on behalf of oil companies – said that trading has been fine. Sure, the general strike in Venezuela is a pain, but in the context of the whole group the disruption is minimal. Venezuela accounts for 6 per cent of business and the strike will only start to have a material impact if it goes on into the spring.

Elsewhere, this fine company is trading according to expectations. It is making particular progress in its business servicing gas turbines, which are in increasing demand as gas-fired power stations grow in numbers. The Wood strategy of small, bolt-on acquisitions has so far been concentrated in this area.

The bigger engineering division is expanding its geographical reach, going into Brazil and Trinidad in recent months. This is key to Wood Group's future, since it needs to shift focus away from the declining numbers of projects in the North Sea, and also ensure it does not rely too heavily on business in the North American market.

The US business has held back group results recently, as Wood's oil company clients have dithered over investment decisions since the 11 September terrorist attacks and in the wake of economic uncertainty. It is unlikely there will be a substantial resurgence of investment until the Iraq crisis is resolved and the UK majors, BP and Shell, both cut their medium-term oil and gas production targets last year.

Wood Group shares, of which the family control 18 per cent, are becoming more liquid, as lock-ins imposed at the time of the float start to expire, but the shares should still reflect a discount for family influence. Instead, the stock – on 15 times forecast 2003 earnings – still trades at a substantial premium to its European peers. This is unjustified, and the shares will be unattractive until it narrows.

Take a nibble at Greggs

Whoever ate all the pies in 2001, they weren't quite so greedy last year. While sales at Greggs, the high street baker, were growing at 9.5 per cent last year, in the 28 weeks to 28 December 2002 they grew by a more modest 5.4 per cent. Wetter weather and perhaps reduced consumer confidence meant fewer people were out on the high street to be tempted by a pasty, a sandwich or a sausage roll. But even 5.4 per cent growth should fatten up the bottom line nicely, notwithstanding the hike in insurance premiums that has affected corporate profitability. Greggs is on course to raise pre-tax profits by more than 10 per cent this year.

The case for tucking into the shares is made by its growth ambitions and by its status as a defensive stock. The company is no high-price eaterie that risks plunging out of favour as investment bankers lose their jobs; it is a straightforward provider of sensible sarnies to those who are always going to need to pop out for a takeaway bite to eat.

Greggs is also an ambitious little outfit, hoping to boost store numbers from the current 1,200 to 2,000 by the end of the decade. That equates to about a 6 per cent increase in space every year (which comes on top of the sort of underlying sales growth which was the focus of yesterday's trading update). The management has developed a strong following in the City, simply for delivering on its promises.

Unfortunately, it is no hidden stock market delicacy and the shares have been well sought after throughout the bear market. Up 35p to 3,290p yesterday, they now trade on more than 15 times the earnings being predicted for this year by ING Financial Markets. It is a fair price, rather than a high one, and the stock will still be appetising to long-term investors.

Vardy is only for reckless drivers

Warning: icy driving conditions ahead. If the Dixons trading statement yesterday signals a freeze in consumer spending, then car dealerships are not the companies to buy into this winter. Sir Peter Vardy, chief executive of Reg Vardy and son of the founder, bemoaned having scheduled his company's (good) interim results for the day Dixons knocked the stuffing out of the retail sectors. His shares skidded down 22.5p to 314p.

Low interest rates, booming house prices and more competitive deals have encouraged people to splash out on new cars in record numbers. But 2003 is already forecast to be a down year and if the consumer really does lose confidence, the car – new or used – is the first big purchase likely to go. Sir Peter said yesterday that manufactures have felt the need in recent months to wholesale their wares at extraordinarily low rates, and Reg Vardy has stocked up. The risk now is that it will find consumer confidence collapses too quickly to shift the stock at decent margins.

A reshuffle of its dealerships meant it was difficult to read much into yesterday's news of a 20 per cent rise in interim profits to £17.7m. But Reg Vardy's financial position is robust enough to stand it in good stead for the industry consolidation that will come this year. Its £50m overdraft should be enough to pay for the 20-odd extra dealerships to take it to its target of 100 by the end of 2004.

Acquisition-related growth should ease some of the pain from any consumer downturn, but the shares are only for reckless drivers.

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