Expect BOC Group shares to balloon

Caffe Nero is one to watch; Give City trainer BPP a workout

Later this summer, two men in spacesuits filled with BOC oxygen will strap themselves into a hot air balloon the height of the Empire State Building filled with BOC helium and try to break the world altitude record for a manned balloon. Who says there is nothing exciting about the UK's biggest industrial gases group?

BOC Group's shares were gently rising yesterday, too, thanks to some pretty impressive third-quarter results.

Don't get carried away with the idea that sales are showing a dramatic improvement. Conditions in the crucial US market are as tough as ever. Asked whether he believes the US is heading for a "double dip" recession, the chief executive Tony Isaac replies that he hasn't seen any upturn in demand since the first dip.

So how did BOC manage to inflate pre-exceptional profits by 8 per cent in the third quarter? Some 1,200 former employees know the answer to that one. The redundancy programme, which will eventually top 1,700 job losses, will save £120m a year.

Mr Isaac is proving adept at matching supply with demand. Profit across all its business divisions are up on the same quarter a year ago, with the exception of BOC Edwards, which makes pure gas for use in the production of microchips. Sales here are likely to fall back in the next few months since there is still no sign of a pick-up in demand from BOC's customers' customers.

Elsewhere in the group, despite poor demand, BOC has managed to keep prices of its products relatively stable. So the company is generating enough cash to cover its interest payments 4.5 times over and is taking advantage of the depressed state of the market to pick up acquisitions. It has spent £200m so far this year and promises another £300m in the next 15 months.

The impact of a falling dollar is not as great as the market has feared, since some of what the company loses in translating US earnings into sterling it makes up from having much of its borrowings in dollars. The stock has been unfairly deflated in recent weeks and, trading at historically low multiples, deserves to ascend from here.

Caffe Nero is one to watch

Is consolidation of the coffee bar market brewing? Caffe Nero, the largest independent café operator, said yesterday it had built a 4.3 per cent stake in its troubled rival Coffee Republic. The news sent Coffee Republic shares up 1.25p to 4.5p, valuing the business at £9.7m.

Caffe Nero views the investment as a strategic holding in a distressed competitor rather than a precursor to a takeover. But that could change if another coffee shop chain makes a move. Analysts don't expect Coffee Republic to survive alone for long. Last month, its founder Bobby Hashemi said he would consider merging with another operator after revealing a £7.5m annual loss and halting expansion plans.

Caffe Nero – whose shares fell 0.5p to 25.5p – is not the only investor to see value in Coffee Republic's shares. The hi-fi tycoon Julian Richer, a friend of Mr Hashemi, has recently pulled together a 16.03 per cent stake in the business.

Coffee, however, is a harsh market. Even the big boys – the American giant Starbucks and Whitbread's Costa Coffee – struggle to make a profit despite their heavy presence on almost every British high street. And McDonald's, the giant of the fast food world, sold out of the business in April after just a couple of years of trying to make money in the industry.

Caffe Nero bought the Aroma chain from McDonald's for £2.15m to become the UK's leading independent coffee bar operator, overtaking Coffee Republic.

Investors hoping to make a quick return from a takeover could look at Coffee Republic, but may get their fingers scalded if a bid does not materialise. The smaller Aim-listed Madisons Coffee, down 0.25p at 5.5p, could also be vulnerable to an offer, but is not worth buying for its own prospects. Don't have a flutter on either bid prospect with money you can't afford to lose.

Those looking for a business with stronger fundamentals would find Caffe Nero a safer bet, but should wait until after its annual results next month before investing.

Give City trainer BPP a workout

A city training group might not be an obvious port of call for an investor looking for a great dividend yield and solid trading to underpin it. In fact, you might put it alongside the IT recruitment consultancies in the file marked "...not until the economic recovery". But in BPP's case, you could be missing out.

BPP offers a wide range of professional courses in financial, actuarial and accountancy services. In fact, the tax and accountancy courses make up the bulk of the group's turnover and have been going great guns. Suddenly everyone wants to be a fraud-buster. The company has been expanding across the UK, with new training centres opened in Cardiff and Cambridge.

So the group was able to post a 27 per cent rise in interim profits, to £6.3m, despite seeing almost three-quarters of its operating profit from the financial services division wiped out by the redundancies that have plagued the City. The company said that demand for longer professional level courses in this division has increased, though, which bodes well for the future.

BPP also has growing interests in legal training and enrolment for the new academic year is impressive. It was spending on a new Law School in London that led to a cash outflow of £9.5m in the first half but, with course fees coming in this month and next, Dresdner Kleinwort Wasserstein, the house broker, predicts an outflow of just £1.5m over the full year. The company was confident enough to hike the interim dividend by more than 10 per cent to 4p.

The broker also upgraded its forecast of full-year profits to £15.5m, putting the shares (up 3.5p to 239p) on a price-earnings multiple of 14 and giving a yield of 5.1 per cent. Buy.