Investment Column: Tomkins takes pleasure from painful hit

Our view: Sell

Share price: 190.1p (+12.8p)

A plunge into the red, sales down by a third and swinging job and dividend cuts. It looked anything but pretty – and yet Tomkins shares were strongly ahead yesterday. Does the market know something?

The engineering group is a casualty of the downturn, with its exposures to the US automotive and housing market being particular sources of pain.

It has responded with relative swiftness, slashing capital expenditure and costs, as it seeks to deal with the new environment. These programmes – together with the inevitable writedowns – produce painful one-off hits and resulted in an interim $114.9m (£69m) loss at the pre-tax level, compared to a $61.3m profit over the same period last year.

However, the operating profit ($82.3m), while only just over a third of the figure last time, was rather higher than analysts had expected suggesting that the medicine, while painful, is working. They also took heart from the company's comments, suggesting that its markets remain very shaky, but are at least stabilising. The company could also yet benefit from the US cash for clunkers programme, which is designed to stimulate its torpid automotive markets.

Still, all that said, significant uncertainties remain as the company was at pains to stress, and yesterday's rise looks like it has gone far enough.

Trading on 34 times next year earnings (although that improves dramatically through 2010 and 2011) it is rather difficult to justify buying the stock at these levels.

Tomkins could yet prove to be a good recovery play. And if the shares drift back down to more realistic levels over the coming weeks we would be more interested. The next couple of quarters will be the crucial ones, but at the moment we think these shares have gone far enough and so would cash in and sell.

Greencore

Our view: Buy

Share price: €1.41 (-3c)

Last year, Greencore's convenience food business suffered mild indigestion, as consumers started making sandwiches at home and taking them to the office. But the sandwich-maker, which supplies ready-meals, salads and bottled water to the UK's biggest supermarkets, yesterday unveiled a tastier set of numbers. In the four months to 24 July, convenience food sales rose by 2.5 per cent to €278.1m. This was largely driven by 4.4 per cent growth in sales at its chilled food arm after it expanded its value range of sandwiches and consumers gave up making their own.

More appetising for investors was the 43 per cent underlying sales growth at its fledgling US convenience foods business, which only launched last year but has already signed up big names. Greencore is not risk free with net debt of between €280m and €300m. But it completed a significant refinancing in April that means none of the debt matures this side of 2012. After yesterday's update, some City analysts upgraded Greencore, which trades on a forward 2010 price-to-earnings ratio of 9, to buy. Given the potential in the US, we tend to agree.

Psion

Our view: Hold

Share price: 72p (+ 3.75p)

Psion is looked upon fondly by many who remember the clunky plastic bricks which acted as their personal digital organisers. The company has gone through several guises in the 30 years since it was launched in 1980, and has now ditched its consumer focus in favour of targeting blue-collar workers for its rugged PDAs instead, making devices for warehouse supply chain management and even tracking goods through ports and border security. Psion has been through some tough times, and the recession has bitten hard. It brought in new chief executive John Conoley last year, who set about overhauling the management team, cutting costs and repositioning them for growth.

There are now tentative signs that the strategy was working, despite a first half loss of £1.1m on sales, down 27 per cent. The group said demand had improved since June, and Mr Conoley said he wants to move beyond cuts and grow the business. He believes there are 10,000 "micro niches" where his products can provide value from American football helmets to auction houses and the Polish forestry business. Some of the bigger contracts have dried up in the downturn, but the smaller companies have kept buying and cost savings should help when the markets come back. The stock is trading on 5.1 times estimated earnings for the full year, almost a third less than its peers, according to FinnCap, with a yield of 5.3 per cent. There is value to be had if the plans work, but it is early to call a recovery. So Hold for now.