The Investment Column: New contracts look set to underpin continued growth at WS Atkins

Ardana; Abacus Group

Our view: Take profits

Share price: 865.5p (+27.5p)

If readers had bought £1,000 worth of WS Atkins shares on 1 October 2002, their stake would be worth more than £17,300. Shares in the engineering consultancy continued their meteoric rise yesterday after the group put out a bullish trading statement in which it boasted that its full-year results would come in at the "upper end of expectations".

Analysts now forecast pre-tax profit of about £70m for the year to 31 March 2006, up from £60m last time around. At its biggest division, called design and engineering, WS Atkins has won major new contracts from the likes of the Carbon Trust, the Department for Environment Food and Rural Affairs and British Nuclear Group. There was also news of a £65m rail infrastructure deal which will see the group do re-signalling work for Network Rail.

Analysts are expecting a significant increase in rail investment, particularly in signalling, over the next few years. They tip WS Atkins, a market leader in this field, to cash in on this trend.

How has this awesome turnaround at the company come about? In the months that followed its October 2002 nadir, WS Atkins took steps to clear its debt burden by selling off underperforming assets. It abandoned a disastrous diversification into facilities management and education services and focused on planning, designing and aiding other companies' engineering projects (via its design and engineering division).

This is now key to the company's future and gives it exposure to some of the world's fastest-growing economies including Dubai, India and China. Anyone who bought into the company in the autumn of 2002 should consider taking some profits at current levels. Not doing so would be greedy. But that does not mean abandoning the stock entirely. It trades at a discount to peers and this is unwarranted.

Ardana

Our view: Buy

Share price: 130p (+2.5p)

Ardana's announcement yesterday that its testosterone replacement cream had passed an intermediate clinical trial was good news for many men and the company.

For Ardana its another step towards a launch of its cream in the United States next year and follows the positive discussions it had with the US Food and Drug Administration about the product in February.

For those men who do not produce enough testosterone it is also a breakthrough. Testosterone shortage is common in men, with about one in 200 suffering from it. The market for testosterone replacement is huge - worth about $473m (£270m) in the US alone. Ardana believes the cream has advantages over existing treatments such as injections, gels or tablets, as it can be applied over a smaller area than gels and contains less alcohol, which can trigger rashes in some people.

Ardana, headed by Maureen Lindsay, has been built around the discoveries of the Medical Research Council's human reproductive sciences unit in Edinburgh. It has a number of other drugs in its pipeline, the lead product among them being Teverelix - a compound drug with the potential to treat a range of conditions including prostate cancer and endometriosis, a condition of the uterus for which there is currently barely any treatment available.

Ardana is one of The Independent's stock tips of the year. Given yesterday's positive news it remains very much a buy.

Abacus Group

Our view: Buy

Share price: 156p (+10.75p)

The electronics distributor Abacus has made its second acquisition of the year. Yesterday it unveiled the purchase of Axess Technology in a deal worth £16m. Swallowing the profitable French-based company makes a lot of sense and sees Abacus become Europe's fourth-biggest player. The deal will be earnings enhancing from next year and comes hot on the heels of the takeover Deltron Electronics, a rival.

Abacus makes money by buying electronic components from the likes of Intel then selling them to manufacturers such as Philips at a higher price. The difference it keeps as profit. In recent years the sector has suffered a sharp slowdown in growth as manufacturers moved their operations to low-cost parts of the world such as India and China. To keep its profits growing Abacus has decided to play the role of sector consolidator.

January's acquisition of Deltron sees the combined Abacus/Deltron entity enjoy £5m of cost savings per annum. Once this process is complete it will give a dramatic boost to the group's bottom line.

Analysts expect Abacus to make a profit of £12m for the year ending 30 September 2006, rising to £18m in the year after. But these forecasts could well prove to be too conservative. First, recent market research suggests that industry conditions are starting to improve. Second, if the company continues to make prudent acquisitions - and all indications suggest it will - we could see its earnings further enhanced.

At 156p, Abacus shares trade at just 11 times forward earnings and boast a 5 per cent dividend yield. Given the potential for earnings upgrades that is cheap. Buy.