The defence industry remains tough, although Vickers' exposure is diminishing as it strengthens its marine engineering and turbine divisions. Earnings from defence are hard to predict because they depend on continued success in passing reliability tests.
The immediate future is dominated by the end of contracts to supply the Ministry of Defence with Challenger tanks in 2000. Vickers plays down the importance of winning closely-contested export orders and cites confirmation by the MoD of exclusive negotiations for 30 tank-like repair vehicles as evidence.
Meanwhile, the enlarged marine division has suffered a downturn in orders from the offshore oil industry. Ulstein includes some weak businesses, especially compared with Vickers' own marine operations.
Vickers is embarking on a cost-cutting spree and anticipates savings of pounds 10m next year. Once the offshore industry recovers, Vickers expects the division's overall markets to enjoy 6 per cent sales growth on average over the next 10 years.
Healthy orders from cruise ship manufacturers provide some earnings ballast at least. Less predictable is the outlook for turbines, braced for a downturn in the aviation industry. US rivals chasing volume have forced down prices of the components Vickers specialises in. Vickers' response has been to cut the division's workforce, resulting in flat underlying profits in the period. The company also has some potential blockbuster projects in the pipeline. Talks continue with several European engineers to develop light, armoured vehicles.There's also development projects, fully-funded by the MoD, for advanced reconnaissance vehicles.
Despite the strength of the marine business, investors should be concerned by the signs of downturn in the aerospace turbine market. Any resurgence in Vickers' offshore markets looks some way off.
Dresdner Kleinwort Benson expects pre-tax profits of pounds 68.5m and earnings of 23.1p per share this year, putting the shares, at 186.5p, on a forward price earnings ratio of just eight. That seems cheap, but given the uncertainties the rating is fair. Steer clear for the time being.