The Investment Column: Financial crisis may put the brakes on HR Owen's growth

Smiths Group; Premier Farnell

Alistair Dawber@AlistairDawber
Thursday 20 March 2008 01:00

Our view: Sell

Share price: 139p (+1.5p)

City traders' annual trip to an HR Owen showroom might have to be put off this year if bonuses in the crisis-hit Square Mile fail to stretch to the latest Ferrari or Lamborghini.

The credit crunch has come at just the wrong time for a company that has reverted to its traditional business of selling sports cars to the rich and famous after several difficult years trying to break into the market for lesser motors.

On the positive side, the firm argues that its order book is full and that the influx of industrialists and financiers from emerging markets is more than supporting any downturn from local clients. But the longer the world's financial crisis lasts, the more likely businesses such as HR Owen will suffer. One analyst at Brewin Dolphin reckons that investors should be "extremely cautious", and points out that the firm attracts few institutional shareholders.

The firm's chief executive, Nick Lancaster, argues that the numbers are good and that rather than the firm relying on orders placed months ago, trade is brisk. Orders placed before the financial crisis started could be withdrawn if people decide they cannot now afford their new cars, and that simply is not happening, he says.

Bentley, which is owned by Volkswagen, which in turn is controlled by Porsche, bought a 27.9 per cent stake in the firm on Tuesday. Analysts say Porsche is keen to ensure that its cars do not depreciate too much after HR Owen and other dealerships sell them on. Mr Lancaster says the buyers are more interested in ensuring that HR Owen – long the subject of takeover speculation – retains its independence. Bad news for investors that were likely to have benefited from a takeover battle for the firm.

Results posted yesterday showed a pre-tax profit of £2.8m, up from £700,000 in 2006; the company proposed a 2p-a-share dividend. Sell.

Smiths Group

Our view: Hold

Share price: 358p (+17p)

Philip Bowman, who took over as chief executive in December last year, is not a happy man when it comes to talking about Smiths Group's medical business.

The company makes and distributes a wide range of hi-tech equipment, from X-ray machines and bomb-detecting devices to medical instruments. While the detection and engineering side of things is thriving, the medical arm has faltered in the last year, largely due to poor distribution. "It is not good enough," Mr Bowman says. "Customers need to start getting what they want, and when they want it."

Operating profits in the medical business last year were flat compared with 2006 figures, while the company posted an overall rise of 6.7 per cent to £158m.

Those running the medical arm have been given two years to turn things around, after which Mr Bowman does not rule out the possibility of selling bits, or the entire group. Mr Bowman has a reputation of making businesses more profitable and then selling them on, as at Allied Domecq and Scottish Power. "Our view [is] that the company ultimately will be broken up," say watchers at UBS.

The performing area of the business, detection, is enjoying a purple patch, largely because of government security spending. The US government is keen that airline passengers spend less time going through security controls, which is good for Smiths, which is developing systems to allow travellers to keep laptops in bags and liquids in bottles before they board planes. Hold.

Premier Farnell

Our view: Buy

Share price: 161p (+18.75)

Management at the electronics distributor Premier Farnell offered a pleasant surprise for City analysts yesterday with better-than-expected results; most were left falling over themselves to recommend a buy for the group.

The firm's chief executive, Harriet Green, points out that the numbers, which show an 18 per cent increase in profits, take account of a period that includes eight months of global financial instability. Indeed, the fourth-quarter profits, up 27 per cent, suggest that the firm is bucking the trend of companies toiling in credit crunch woes.

But why? Largely, analysts, say because the firm has moved much of its sales operation online, cutting back on a costly physical sales force, and allowing its techie clients to order goods for themselves.

"Strong results are a sign that the new web-based focus on the higher margin segment of the market is working," say watchers at Seymour Pierce.

"The strategy seems to be bearing fruit and the business is accelerating across the board," agree watchers at Goldman Sachs, who remain neutral on the stock, and warn that a more severe economic downturn could, in the end, be bad for the group.

Ms Green dismisses this, saying that the group has diversified by increasingly targeting wealthy emerging markets. The firm, which plans to have 20 per cent of its sales to these areas by 2010, is already yielding results after achieving 15.9 per cent in 2007. Buy.

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