The Investment Column: Steer clear of Kesa as long as downturn lasts

Kesa

Our View: Sell

Share Price: 105p (-7.25p)

If Thierry Falque-Pierrotin makes new year resolutions, he will probably pray that Europe does not suffer one of its most severe retail slowdowns in living memory next year. This is because Mr Falque-Pierrotin, who has been the chairman and chief executive of Redcats Group, the home shopping company, since 2001, was unveiled yesterday as the new chief executive of Kesa Electricals from January.

Indeed, these are tricky times for Kesa Electricals, the pan-European group whose portfolio of electricals chains in 12 countries includes France's Darty and the UK's Comet.

While Mr Falque-Pierrotin spoke of driving growth, his main role over the next 12 months will be to manage the downturn, particularly in three of its biggest markets, the UK, France and Spain. In the UK, Comet has been badly buffeted by the credit crunch and the UK housing slump, resulting in tumbling sales of white goods, such as washing machines and freezers.

For the three months to 31 July, Comet's like-for-like sales fell by 9.9 per cent and Kesa said it anticipated the UK chain would make a loss in the first half. The group is also struggling in Spain.

In France, the market leader Darty has built a well-earned reputation for customer service, based around a strong product offering, and it is that combination that Mr Falque-Pierrotin will need to continue rolling out across other countries where Kesa has operations, including Holland, the Czech Republic and Italy.

Kesa's shares, which fell by 7.25p to 105p yesterday, certainly look cheap, trading on a price to earnings ratio of 6.4 for its 2009 financial year. But with the housing market and consumer downturn set to run right through next year, it is hard to see much upside in Kesa's shares for the foreseeable future. Sell

Cookson Group

Our View: Buy

Share Price: 381p (-54.5p)

At the end of the movie Terminator II, good terminator Arnold Schwarzenegger destroys bad terminator Robert Patrick in a steelworks by throwing him into a vat of molten metal. If, like me, you wondered what can channel the steel at temperatures of 2,000 degrees then look no further than Cookson Group.

The UK-listed firm dominates the market for ceramic parts for the steel industry, making equipment such as tubes and slide gates to flow the molten metals. It is a niche business, but in constant demand as the parts often need replacing within hours of installation due to the extreme heat involved.

The group has successfully repositioned itself in the foundry business, after a dependency on electronics caused serious pain when the technology bubble burst. At the time, the group was also highly geared following several acquisitions. Cookson still has an electronics division, which will continue to drag on profits, but the ceramics unit has held firm. It makes up 75 per cent of the group's earnings before interest and taxation.

However, there have been fears metal consumption is set to slow as the credit crunch intensifies, but the company maintains it is a secure revenue stream. It said while growth may not be up 6 per cent next year, it will not fall into negative territory and could well be around 3 per cent, a pretty solid revenue stream given the circumstances.

The group's acquisition earlier this year of Foseko for £500m looks to have been integrated well as yesterday's third-quarter results showed. The stock looks pretty well positioned and cheap at an estimated 8.6 times this year.

Xchanging

Our View: Buy

Share Price: 235p (-14p)

Cost saving is always popular in a downturn, which should be good news for the outsourcing group Xchanging, which looks to have sealed a canny deal in the past week. The group revealed after the markets closed on Friday that it had taken a 75 per cent controlling stake in Cambridge Solutions for £83m.

Cambridge is an Indian company that provides offshore business process outsourcing – the complex end of what was once known as "body shopping". It has 4,500 employees in eight countries. The move will boost its presence overseas, especially in India and in the US and Australia. The deal was done at a pretty full price, but the company is sure it will boost profits pretty soon after the two tie up.

Analysts have called the decision to bring in an outsourcer to the insurance, banking and financial services market an "obvious" fit as it reportedly bids for three big insurance contracts, needing cross-border operations.

Xchanging looks more expensive than the UK technology services sector with a price to earnings ratio of 17.7, although it is at a discount to rival Capita. It showed trading remains robust in a defensive sector with a positive interim statement on the same day. For the company that sponsored last year's Oxford and Cambridge boat race, it looks plain sailing at the moment: could be worth a punt.