The Investment Column: Wolfson powers on but it may be heavily exposed to downturn

Click to follow
The Independent Online

Wolfson Microelectronics

Our view: Fully valued

Share price: 169p ( +10.5p)

Wolfson Microelectronics makes the chips used to power everyday gadgets from set-top boxes and Apple iPods to flat-screen televisions and satellite navigation equipment. The technology is changing at breathtaking pace, and the company has established a reputation as a high-quality developer and innovator.

Wolfson has set out to reduce its reliance on any one sector so that no one product area accounts for more than a quarter of output. Its clients include a veritable Who's Who of industry, embracing Hewlett Packard, Canon, Microsoft, Samsung and Sony.

The final quarter of last year was the best ever. Revenues were up 36 per cent, and operating profits increased by 20 per cent. So the company ended the year with overall turnover up by 13.5 per cent, although pre-tax profits of just over £20m was 18 per cent down, depressed by acquisitions, currency movements and restructuring and redundancy charges.

Growth was fuelled by demand for chips used in portable navigation devices, digital still cameras, multimedia phones and handsets – up by 52 per cent alone during the final quarter. Edinburgh-based Wolfson also supplied chips for Bluetooth headsets – up by 265 per cent during the year.

The opening quarter is expected to see revenue grow by between 10 and 20 per cent, but Wolfson admits conditions are uncertain. It is pressing ahead with its new AudioPlus strategy, focusing on products with improved sound quality, performance and battery life, which it is hoped will widen its customer base. Last year it introduced 16 new products, giving it a total of 122.

The shares sell on around nine times forecast earnings, which is not demanding. But Wolfson is heavily exposed to markets largely dependent on discretionary spending, such as iPods and televisions, which could come under pressure. On this basis, the shares are sensibly valued for now.


Our view: Buy

Share price : 200.75p (+1.5p)

Shares in the recruitment firm SThree have fallen 60 per cent since July. The whole sector has been badly mugged. The worry was that recruitment work would dry up as employers stopped hiring because of the credit crunch.

The market got it wrong. SThree continued to prosper. It also sees no sign of a slowdown this year. Profits for 2007 rose by a quarter to £50m. Fee income grew to £522m, while the dividend payout was up 29 per cent – not the action of a company in distress.

There was an easing of demand for jobs in the credit and risk market, which should come as no surprise, but this represented a small part of the total business.

The bulk of jobs are filled in the information and communications technology area, where pay is around £45,000-££50,000. So SThree, which trades under 12 different brand names, such as Computer Futures and Huxley, is comfortably placed in the middle of the market.

The number of people placed in permanent jobs rose 30 per cent, with fees up nearly 10 per cent. Temporary work, which tends to be more resilient when the economy is sliding into recession and firms are reluctant to hire full-time employees, went up by 20 per cent, with a similar rise in commission.

Overseas work now accounts for a third of the total. Offices were opened in Amsterdam, Brussels and Rotterdam, and a toehold established in Hong Kong. There are now 52 branches in 10 countries.

The company has begun filling other jobs in accountancy, banking, engineering, and pharmaceuticals. All indications during the first two months of the current year – such as the number of people attending interviews – supports its view that this year will be strong.

The shares sell on just over six times forecast earnings for 2008. Buy.


Our view: Avoid

Share price: 11.5p (-0.25p)

Woolworths has been a basket case for years. Successive managements have failed to revive the slumbering giant. So much so that retail analysts have asked whether we would even notice if Woolworths disappeared from our high streets.

A harsh judgement, but when you consider the whole group with £2.7bn of sales is valued by the stock market at £171m, then perhaps not. Ted Baker, with a fraction of that turnover, is worth £211m, Mothercare £350m, and HMV £520m.

But one broker with a fine reputation in retail stocks is saying it is time to buy the shares again. Recovery is in the air. The stores are starting to benefit from promotions such as Worth It! trumpeting its value-for-money ranges, while other merchandising initiatives are helping sales to push ahead. Costs are being attacked, bringing down stock levels, which have traditionally been higher than other chains.

Optimists will cling to the belief that Woolworths can defy the supermarkets' aggressive moves into areas such as music and entertainment sales which are so important to it. More evidence of recovery is needed before buying the shares even at current depressed levels. Avoid.