There are still some winners in IT

The Investment Column

Here's a simple question. Should investors be buying information technology stocks at the moment? A quick glance at the share price performance and ratings of many computer service companies suggests not.

Most are on sky-high valuations, driven by growing demand for computer re-programmers to solve the millennium problem and prepare for monetary union and a general explosion in the use of IT. Shares in Parity, which reported interim results yesterday, have outperformed the All-Share by 230 per cent over the last three years. The shares up another 39.5p to 531.5p yesterday after the company reported a 32 per cent rise in profits for the six months to June, stand on a heady 26 times forward earnings, according to forecasts from Tim Steer at Merrill Lynch.

So after such a good run, should investors be taking profits in the computer services and IT sector? The answer is no, not if you choose your company carefully. That is part of the problem. Computer service companies are a staggeringly diverse lot. They include software and hardware providers, like Micro Focus, IT outsourcers like Sema, FI and Logica, IT staff agencies like Delphi, Parity and CRT and trainers and consultants like Admiral, Logica and Parity.

As a general guide, those IT companies most likely to reward investors are those involved in people-related computer services - IT agencies, trainers and outsourcers - rather than software or hardware providers. The Holway Report, the IT watchers' bible, forecasts that the market for IT training will grow by an average 19 per cent a year to 2000 against a 4 per cent decline in the software providers market.

Some IT stocks will face pressure. Staff turnover at an average 25 per cent and wage inflation at 20 per cent for the most skilled IT staff will undoubtedly squeeze margins. The shortage of IT staff is also a critical issue. Those companies like Parity which have access to large pools of contract staff are likely to fare better than companies like Logica, with a large fixed staff base. Margins will also suffer as customers start demanding lower contract prices in return for longer, more secure contracts and higher volumes. The winners will be companies like Parity which swap to small customers, which lack their own IT support and are therefore prepared to pay for help.

However the doomsters who predict that there will be a sharp tail-off of work after the year 2000 are undoubtedly wrong. Richard Holway reckons the outsourcing of Internet and Intranet services - where IT companies write and manage web pages for their customers - has barely begun. Other growth areas are communication, data warehouses and legacy systems. Rather than be put off by high valuations, investors should look for IT companies - like Sema, Parity, FI and Misys - best placed to keep growing.

Brown & Jackson

buys opposition

Brown & Jackson, the discount retailer which was on the brink of collapse three years ago, appears to be moving towards a more aggressive phase that might, just might, offer some hope to its weary shareholders.

Now controlled by the South African Pepkor Group, the Poundstretcher retailer, which could hardly afford one of a pack of its own loo rolls a couple of years back, is actually making an acquisition.

It is paying Pepkor pounds 7.65m for the Your More Store chain of 127 discount stores. These have been competing with B&J's Poundstretchers and were built up by Johan Visser, who was appointed chief executive of Brown & Jackson in March.

The deal will be funded by the issue of more shares at an expected price of 16.5p, compared to yesterday's close of 17p, up 0.5p.

Though Your More Stores is also a discounter, there are several differences. First, it actually makes money - pounds 750,000 last year on sales of pounds 34.7m. Second, its stores are smaller and do not offer product lines such as toiletries and confectionery which are available in Poundstretcher.

The reasons for the deal are to inject profits into Poundstretcher, to enable in-filling in smaller towns and to achieve better synergies in areas such as buying. Some costs may be stripped out though Mr Visser says the rationale for the deal is buying power more than cost-cutting.

Certainly, taking over your most obvious competitor is a logical way of making headway in a cut-throat and mature market and Brown & Jackson certainly needs a boost.

Yesterday's figures showed reduced losses of pounds 2.7m in the year to June though it did turn in an operating profit of pounds 0.5m compared to the previous year's pounds 3.1m loss.

More worrying is the sales line, where like-for-like sales were only 1 per cent ahead last year. Though current trading is better it is clear that the discount market is not a happy place to be at the moment.

On the positive side, Pepkor has made widespread management changes, with five directors leaving the board in the past year. On forecasts of pounds 1m profit this year, after several years of losses, Brown & Jackson's shares trade on a forward rating of 21. As ever, one for the brave.

Stoves' springtime drop 'just a blip'

Stoves, the specialist kitchen stove makers, yesterday confirmed a springtime drop in sales which they blamed on consumer nerves ahead of the general election.

Sales in the fourth quarter of the year to the end of May were little higher than at the same time in 1996 after running 30 per cent ahead in the first three quarters.

But the company still increased turnover for the full year by 27 per cent to pounds 80m, while pre-tax profits rose 21 per cent to pounds 5.2m, bang in line with forecasts from Dresdner Kleinwort Benson, the house broker.

The tax charge rose from 18 per cent to 32 per cent as previous tax losses were finally used up, cutting earnings per share to 13.9p, but this too was anticipated.

It was the eighth successive year of growth and the spring downturn is now confirmed as a blip.

Sales of cookers traditionally rise when the housing market is strong, and the company has little exposure to the effects of a strong pound.

New products in the pipeline include a rotary gas burner that will combine the moistness of gas cooking with the even heat of a fan-assisted oven, while sales to export markets in Germany and the Netherlands are beginning to build up.

A new distributor has just been signed to handle the 20 per cent of deliveries which go direct to purchasers' homes.

That should help control distribution costs, which rose 54 per cent to pounds 7.3m last year.

The current year's capital spending should be no higher than the past year's pounds 4.4m, and analysts are hopeful that profits will resume their upward march to pounds 7.2m, equal to 19p a share.

But the shares, which peaked at 330p in February, still reflect the springtime setback.

They gained just 1p to 268.5p yesterday, only 14 times forecast earnings. That looks like a buying opportunity.

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