US legal cloud over Lucas lifts

INVESTMENT COLUMN

The headline number may have been a lot bigger than the market had hoped but what really matters about the conclusion of Lucas's row with the US government yesterday is that it is finally over. A total hit of pounds 95m will take the shine off full-year figures next Monday, but the cars and aircraft engineering group's new chief executive, George Simpson, will at last be able to stand up and talk about the future.

Since the beginning of 1994 Lucas has lagged behind its engineering peers, partly because of the cloud of litigation, partly because the market was holding fire to see just how quickly Mr Simpson could get to grips with his new charge. Over the past 18 months Lucas's shares have trodden water, marginally under-performing the market as a whole. Over the same period BBA has beaten the All-Share index by 43 per cent and GKN by an impressive 55 per cent.

The markets Lucas serves are undeniably still tough, but not worryingly so. Aerospace is picking itself off the bottom and arguably could be peaking in two or three years' time just as the automotive markets falter. Double- digit margins on sales of around pounds 500m should make most analysts' forecasts look conservative.

In motors, Lucas is heavily biased towards the UK and Europe, which is good news in the face of an expected downturn in the American car market. Relatively flat markets in Europe shouldn't be a concern, with Lucas holding strong positions in fast- growing areas such as diesel technology, intelligent braking and other electronics.

Before the exceptional charge, pre-tax profits next week should top pounds 140m, from sales of pounds 2.95bn, a great deal better than the performance of the last few years but still hardly a stirring return on sales of less than 5 per cent. By the time tax has wiped out the post-exceptional profit, earnings will just about break even, so reserves will have to be raided once more for a maintained full-year dividend of 7p.

The flip side of still-poor margins, of course, is the high degree of operational gearing still in Lucas's now-clean businesses. By next July profits should have reached pounds 215m, covering the payout twice. The cover could have reached three times by the following year.

That puts the shares on a prospective price/earnings ratio of 13, with a yield of 4.5 per cent. Given the recovery prospects, that is pretty good value.

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