Investment: Hi-tech stock poised to regain glamorous past

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The Independent Online
THIS WEEK I had intended to give you full details of my criteria for investing in growth shares, but as they used to say during the Second World War: 'We have to interrupt this broadcast.'

Yesterday a leading broker sponsored a presentation to institutions of a company that has some exciting new products and attractive investment fundamentals. I have had an interest in the shares for some time and feel that the price might be about to make a substantial upward move.

Let me tell you more about the company, Amersham, a world leader in the supply of advanced products and specialised technologies for use in life science research, healthcare and industrial and environmental quality and safety assurance.

The description comes from the company's own blurb. If you want a little more detail, try, just for openers: 'Scintillation proximity assay technology' and 'Enhanced chemiluminescence'.

One thing is for certain - the products are high technology. They include a brain imaging agent for Alzheimer's, stroke, epilepsy and head injury; another for investigating restrictive blood flow to the heart muscle, and one that has just been approved for marketing in America by the FDA, for diagnosing bowel and ovarian cancer. There are many other products of similar quality and more are being developed every year.

Amersham is bound to suffer a little from the Clinton effect on healthcare stocks. However, as you can see, the company's products are very specialised indeed and almost invariably have to be prescribed and administered under medical supervision. The company should therefore suffer much less than most healthcare businesses.

Amersham was an Eighties glamour stock that is now making a big recovery after a period of four years of declining profits. The company first caught my eye last summer, when the directors announced earnings for the year ended March 1992 up a dazzling 44 per cent. The explanation was a new management team headed by Bill Castell, who came from Wellcome Diagnostics in 1990 and has since introduced a more cost-conscious and commercial approach. Read his words in the 1992 annual report:

'The group has returned to underlying double-digit turnover growth in each of its on-going businesses. More important, however, is the shift from the purely top-line orientation the group used to have, to a focus on the quality of the bottom line - as reflected by the 2 per cent improvement in trading margins in the on-going businesses achieved overall.'

I have a strong feeling that Mr Castell's approach will be good for shareholders. Two of his non-executive directors seem to agree with me - one bought 1,000 shares in December, the other 5,000 in January.

All of this sounds fine, but we still have to examine the financial figures in some detail. They are the final key, which will help us to decide whether or not Amersham shares are a good buy at the present price.

At the interim stage, earnings were up about 25 per cent and for the full year ending in March 1993, Amersham is expected to be up at least 20 per cent.

Next year, the brokers' consensus forecast in The Estimate Directory is for an increase in earnings of a further 40 per cent. This is a staggering figure. Of course, a substantial proportion is due to devaluation, as well over 80 per cent of turnover is outside the UK. However, this argument could also be applied to many other companies of a similar nature. Their profit forecasts include the benefits of devaluation in just the same way. At the present price of 695p, on the 1993/4 consensus of brokers' estimates of pounds 34m profit and 39.8p of earnings per share, the prospective price/earnings ratio is 17.5.

This may seem high but it compares with a prospective multiple of about 16 for the average FT-SE 100 growth stock, none of which is forecasting anything approaching 40 per cent growth next year.

The interim dividend has increased from 3.7p to 4p. The consensus dividend forecast for the full financial year to March 1993 is 13.5p, giving a dividend yield at 695p of just over 2.6 per cent. This is on the low side, but rapidly rising earnings and a very strong balance sheet with no debt justify the hope of future increases.

Amersham is the kind of high- technology company that I like. At 695p you are not paying a massive premium for fanciful future hopes. Instead, you are buying into a solid company capitalised at about pounds 361m with well over 90 per cent of its turnover overseas, excellent commercial management, freedom from debt, exciting new products and a very attractive p/e ratio in relation to its estimated growth rate.

Next week, I hope to revert to my original plan and give you more details of my demanding criteria for investing in growth shares.

Mr Slater is an active investor who may hold any shares he recommends in this column. Shares can go down as well as up. Mr Slater has agreed not to deal in a share within six weeks of any mention in this column.