The Investment Column: Semiconductor firm is making theright connections
Tuesday 18 March 2008
Our view: Buy
Share price: 16.25p (+0.75p)
The chances are that you've been using IQE's products for years without realising it. If you own a mobile phone, a BlackBerry or a wireless internet set-up then you've probably got your hands on an IQE semiconductor wafer.
A semiconductor wafer, which is manufactured out of gallium arsenide, or GaAs, is a piece of technology that enables computer chips to transmit wireless signals, making the company a techie's dream. But for investors that couldn't give a megabyte about the science, the firm is well worth looking at, too.
According to analysts at FinnCap, who recommend a buy, the company is ideal as a defensive investment. "They are obviously not immune from recessionary concerns," said one watcher. "But mobile-phone makers have to get as many third-generation phones into the market as possible."
The mobile operators spent a fortune a few years ago on the 3G licences and so they need to push them out to as many people as possible; the good news for IQE stockholders is that each device needs four or five times the amount of GaAs than is required for an ordinary phone.
Another reason to be cheerful, says the company, is its financial set-up. According to its chief executive, Drew Nelson, for every pound of revenue, "50 per cent feeds into the bottom line", and the firm has had three consecutive years of 50 per cent growth.
The group announced its annual results yesterday, showing revenue at just a nick over £50m, up from £32.4m the year before, although this came with an overall £900,000 loss compared with losses of £4m the year before.
The company also announced yesterday that it had signed a new contract with US semiconductor group TriQuint. For investors that are squeamish about the arms trade, TriQuint does supply the military industry with its communications technology and IQE's Nelson confirmed that some of the firm's wafers could find themselves in military equipment. Buy.
Our view: Cautious hold
Share price: 483p (-49p)
By their chief executive's own admission, the fortunes of heating and plumbing products distributor Wolseley this year depend on how well the global economy holds up. "People don't lose their jobs and then buy a house," says Chip Hornsby.
The group announced its annual results yesterday. The figures confirmed that the turmoil that struck the financial markets last year hit Wolseley hard, as they reported a fall of 29.4 per cent in pre-tax profits to £233m.
"The results show that things are pretty tough for Wolseley," says an analyst at Credit Suisse, which has an "Underperform" rating on the shares. "And the outlook is pretty bleak, too". "Underperform" is the bank's speak for "sell".
However, several analysts remained upbeat on the company. The lack of consensus centred on whether or not the group is likely to breach debt covenants it has agreed with investors. Credit Suisse reckons the company has not provided enough information to tell; UBS says it won't, and tells clients to buy the stock. The company says that they run various financial scenarios, giving a number of possible outcomes, none of which shows a covenant breach. A third group of analysts at Landsbanki say hold.
Many of the analysts recommend a rights issue, which the company says is not necessary.
Continued bad news will not help. If more investment banks go the way of Bear Stearns, and if the unemployment rate in the US, where 50 per cent of Wolseley's sales are generated through its US divisions Stock and Ferguson, continues to fall, 2008 could be a very tricky year. The fact that 100,000 Americans have lost their jobs in January and February will not be welcomed. Cautious hold.
Our view: Hold for now
Share price: 35.5p (-2.5p)
The world's financial system is in a state of distress and its main protagonists, the investment banks, seem to be struggling to maintain order.
But despite all the gloom, Howard Shore, the chairman of niche investment bank and fund manager Shore Capital, says he has reasons to be cheerful.
Despite the hammering the bank took last year, including a decline in pre-tax profits of 29 per cent to £14.3m, Shore reckons the bank is in a good position to ride out the rest of the credit crisis.
The reasons include that the bank is liquid and its balance sheet is in good order and, moreover, about half its salary costs are linked to performance: if their bankers don't make any money, they don't get paid.
The news on Bear Stearns meant that there was a dearth of analyst comment on the results. However, the bank's shares were down by 6.6 per cent yesterday, admittedly as part of a shocking day for equity markets in the UK.
The bank is in decent shape, especially compared with some of its giant competitors, but ultimately its long-term health will depend on the length of the credit crisis and how long it will take for a recovery to take place. Hold for now.
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