Long-term investors advised to wait before boarding EasyJet

Indian discoveries could make Cairn a gusher; Ulster Television shows that small can be beautiful

This is a risky call, as it assumes a short, sharp war...

So began an interesting note from Peter Hyde of CSFB, one of the top-rated analysts in the transport sector, recommending easyJet shares yesterday.

This column has long taken a bearish stance on the easyJet strategy and most recently argued that the shares were overvalued in November. Since then they have fallen 40 per cent and, though it is indeed a risky call, there are good reasons for thinking that the stock has simply fallen too far, too fast.

Mr Hyde sets out his case like this:

One reason for easyJet's recent weakness has been fears of a significant downturn in air travel as a result of the new war in the Gulf, with investors citing the previous Iraqi conflict as a benchmark.

But if the new war is relatively short and sharp, easyJet could benefit in two ways. Firstly, the so-called "war risk premium" in fuel prices – the fear of disruption to supplies that drove oil beyond $30 a barrel – could disappear, as evidenced by the fall in the price of crude yesterday as markets took a kind of comfort in the certainty of military conflict. Secondly, the European network carriers such as British Airways, Lufthansa and Air France, who control an estimated 90 per cent of the intra-European market, will use the war as an excuse to ground flights to shore up their profitability. That would leave easyJet with scope to increase its market share.

Even those brokers dismayed at the easyJet strategy admit that, at the current price, the shares look due for a bounce, and speculative, short-term investors with an optimistic view of the military outcome in Iraq could make themselves a tidy sum from following Mr Hyde's advice.

Long-term investors are still advised to wait before boarding. It is not clear that easyJet can maintain the growth rates of recent years now the network carriers are responding to the no-frills carriers with full service flights at discount prices – a "cheap frills" offering. EasyJet competes directly with these carriers on many routes and its most recent passenger yield figures suggest rivals are having some success. It is also adding a second make of plane to its fleet, increasing costs, and still has fully to integrate Go. Even at these levels, it is risky indeed.

Indian discoveries could make Cairn a gusher

Cairn Energy owns a lot of holes. A lot of potentially lucrative holes. The oil and gas exploration company – the UK's biggest independent – has made some impressive discoveries on the Indian sub-continent and has been working to commercialise its finds.

Cairn's aim is not to pay shareholders a dividend – it doesn't – but rather to double the size of the company every two years by commercialising its oil and gas finds and trading the assets. Its record on that score has been patchy in recent times, but analysts believe that, if there are no more than the average disappointments, the potential value of current assets is significantly in excess of the current share price. That was down 4.5p at 305.5p yesterday on disappointing figures for last year – when net income before exceptionals was £27.9m, down from £29.8m in 2001.

It is future prospects rather than historic figures that are important, though. Some had been hoping that Cairn would have found a partner for its deep-water interests in eastern India by now, which will be too expensive to commercialise alone. Instead it merely set itself a deadline of the end of this year for finding a partner.

Some of the most exciting work is being done in western India, where the group has found shallow oil and gas reserves. News yesterday was that Cairn has successfully drilled another well, away from the first, where further finds have been made. That increases confidence in estimates of the size of the field and means there is less risk to those analysts' valuations.

Oil exploration is probably the stock market's riskiest proposition now dot.commery has been abandoned. Cairn, though, has kept debt levels to 10 per cent of assets, has a nice income from production of 30,000 barrels of oil a day, and does not operate under any particularly wild regimes. It is a good bet.

Ulster Television shows that small can be beautiful

With the advertising market in the doldrums and Carlton and Granada in a financial bind, you may be forgiven for thinking there is no money to be made from ITV. But away from the chaos of the two main ITV companies, Ulster Television has been quietly building up its revenues and its profits.

In much the same way as regional newspaper groups have found their revenues to be more robust than those of their national newspaper peers, UTV has found local advertising still growing. It increased 5 per cent in 2002, when ITV as a whole declined 1 per cent.

It is a remarkable achievement, considering UTV operates in the most competitive TV marketplace in the UK. Northern Ireland residents can watch four terrestrial channels from the Republic as well as the usual UK terrestrial and digital fare.

The downside of its outperformance is that UTV is having to pay a bigger share of ITV programme making costs, which is related to a franchise's advertising revenues. Earnings growth in 2003 is likely to be lacklustre again for this reason.

Longer term, there are reasons for holding UTV shares which, after jumping 11p to 253.5p yesterday, trade on 14 times forecasts of current year earnings from Numis, the broker. The group is investing heavily in radio assets in the Republic, where it can make some administrative savings to spur growth even if the ad market stays challenging. And its internet service provider has moved into profit. Hold.