The Investment Column: LucasVarity steps up a gear

Despite a good set of numbers, LucasVarity, the Anglo-American automotive engineer, wasn't giving much away to the press about its first- quarter results yesterday. While analysts got a detailed conference call on the first figures in the merged group's inaugural year, neither Victor Rice, chief executive nor Neil Arnold, finance director, were talking to journalists.

Given the level of scepticism about the takeover of Lucas by Varity last September - reinforced by a 25 per cent underperformance in the shares - some sensitivity looks justified. But a more rational explanation lies in its decision to opt for a quarterly reporting policy.

Though this quarter looked good - operating profits rose 12 per cent to pounds 86m - the second quarter of 1997, which analysts estimate will show profits of pounds 97m, will not. The reason lies in comparison with the 1996 figure of pounds 122m.

This corresponds to Lucas's old fourth quarter, which has traditionally been the subject of "window dressing" to improve the look of the figures for the year as a whole. By the same token, last year's weak third quarter at pounds 54m should generate a warm glow when LucasVarity reports much stronger 1997 third quarter numbers: analysts are looking for for an 80 per cent rise to pounds 97m.

A better indication will be given by results for the year as a whole, which Hoare Govett believes will show profits of pounds 326m, for a healthy 23 per cent gain. The group is confident it will hit its pounds 120m cost reduction target - analysts reckon the group saved pounds 5m last quarter - and reduce working capital by pounds 140m over two years. The pounds 100m disposal programme should also be complete by the year end. Margins are already responding, up 0.2 percentage points to 7.1 per cent. Acquisitions are also looking good - contributing pounds 40m to pounds 1.21bn sales, ahead 9 per cent even after a pounds 50m hit from sterling.

Against this, Lucas is battling against sterling and difficult markets. The US automotive market is flat and the French car market could crash 15 per cent this year, but the aerospace and diesel sectors are picking up. Shares in the group rose 7p to 211p. On 14 times, buy for recovery.

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