The Investment Column: The roof falls in on Wolseley as US housing slump hits home

Corin; Hat Pin
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The Independent Online

Our view: Avoid

Share price: 689.5p (-26.5p)

The foundations shook at Wolseley, the plumbing and building materials group, as £600m of value was wiped off within micro-seconds of the first shares changing hands. The group warned that profits for the five months to the end of December are likely to be down by almost a third. The slump in US housing demand is to blame. The crisis is also spreading to Europe.

Wolseley is carrying out urgent repair work on its overheads but it may not be enough to stop the roof falling in again. The group admits present market conditions are likely to worsen. Dearer mortgages and tougher lending policies are bringing home sales to a near standstill, while the commercial building market remains fragile.

The conditions may throw up opportunities, however. Wolseley made ten bolt-on acquisitions worth £170m during the spell and tougher trading means smaller riv-als might fall into its lap.

But this is scant consolation for retrenchment on an epic scale. Around 3,000 jobs have been cut, saving £60m a year and further action is not being ruled out. Trading profits in the US are down 40 per cent. Eur-ope has not suffered so badly – yet – with profits up 1 per cent on revenue 17 per cent higher but some markets, such as Italy, France and Austria, are weak.

The shares have lost 45 per cent of their value in the past year. By the close, they had clawed back a third of yesterday's initial falls. Brokers are expecting profits to fall 20 per cent this year but at this stage accurate forecasting is impossible. Wolseley has not suddenly become a bad company and it has the financial muscle to withstand lengthy weaknesses in its markets. By its own admission, those conditions could persist for some time, which is why there is no strong case for buying now. Avoid.

Corin

Our view: Buy

Share price: 490p ( -15p)

When the orthopaedic parts group Corin won approval last July to sell hip implants in the US, it called it the most important event in its history.

Unfortunately, it chose yesterday to justify its euphoric comments when shares were falling thick and fast. Its own suffered but it should be a temporary mishap.

Sales at the halfway stage last September were only slightly higher. Since then, Corin has been selling its Cormet range of metal hip devices in a tie-up with heavyweight distributor Stryker. They have been outstandingly successful. Full-year sales are 28 per cent up at £36.5m, almost entirely due to Cormet.

The US is the largest market for orthopaedic products and now accounts for more than 70 per cent of Corin's business. Dem-and is fuelled by people living longer but needing joint replacements at a younger age.

The only likely restraint on growth at the moment is manufacturing capacity. The devices are made in the UK and shipped to the US but output may soon have to be cranked up, especially as Corin starts to offer a wider variety of hip implants.

Sales are likely to increase to £60m in the current year, delivering profits close to £18m. The shares are selling on around 17 times expected earnings which is toppy but sustainable based on demand for its products. The prospect of a bid from a healthcare group also gives support to the price. Buy.

Hat Pin

Our view: Avoid

Share price: 46p (-33p)

These are unforgiving markets to get it wrong. So a botched relaunch of one of its key brands wiped 41 per cent off executive search group Hat Pin.

Full-year profits to the end of December will come in around £2.8m, more than £1m less than expected, after its main UK trading company, the Talent Business, hit the buffers.

Gary Stolkin, who was running the outfit, has gone. Talent Business placed executives in key marketing jobs.

A lot of resources were put behind the business as the office network was expanded and new consultants hired. But it started to go wrong, particularly in December during which time Mr Stol-kin's relationship with the board was deteriorating. So instead of making £1.7m, the operation will break even. The other parts of the group have been trading well.

The current year looks unclear. Nearly three-quarters of profits should come from Asia and the Fast East where growth remains buoyant, but there are signs of price weakening in the UK.

House broker Arden has cut its 2008 forecast from £6.1m to £3.7m. Avoid.

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