Shares: Coming good out of recession

LAST week I selected a number of companies reporting results ahead of expectations. There are more, including some trading in such supposed economic disaster areas as Continental Europe. The attraction of such companies is that expectation-beating performance is evidence of a fundamental change in their trading environment, which can last a long time and even improve further.

A case in point is Menvier Swain, which reported a 28.5 per cent increase in profits to pounds 7.6m for the year to 30 April 1993. The company has three divisions - emergency lighting, fire detection and burglar alarms - and does about half its business in the UK. Last year trading was patchy, but this year has seen a string of months of better trading, suggesting that the corner has been turned. A feature of the business is the way in which it has been able to compensate for a flat building market by shifting the emphasis to refurbishment - now at least 60 per cent of the total.

In the past four years, the group has made acquisitions to build a pan-European business, and reports that Continental trading is holding up. For example, both the emergency lighting and the more recently acquired fire-detection subsidiaries in France are both faring well. EC workplace directives coming into force over the next few years will lead to upgraded emergency lighting and fire-detection equipment being required in a vast number of public buildings.

Stockbrokers' expectations of about pounds 10m for the current financial year and up to pounds 12m next year may prove too low, so the shares look attractive at 238p on a p/e that could be significantly below 15 on likely earnings.

Good companies can also benefit from periods of recession, which enable them to grow by acquisition at bargain prices. Sanderson Murray & Elder is a former textile company that has been reborn as a motor dealer under the leadership of Tony Bramall, who has great experience in the motor trade and is proving a shrewd deal-maker. He sold his original motor distribution business to Avis in the booming 1980s and then used SME as a vehicle to buy some of those dealerships back, much more cheaply, in the 1990s. The group recently reported half-year profits of more than pounds 1m, against pounds 1.4m for the whole of 1992. Since the first half, it has acquired the Skipper group of dealerships from RTZ, more than doubling the size of the organisation and putting it on course for sales of pounds 200m-plus this year and probably more than pounds 300m next year. The excitement lies in the scope to apply much more hands-on management to the Skipper dealerships. These were losing money for RTZ but are already profitable under Mr Bramall, who has been able to save on head- office costs. August was a good month for motor dealers, though sales are still way down on the peak years and profit margins are wafer-thin. On forecasts of profits reaching pounds 3.2m this year and pounds 5.8m next, margins will be below 2 per cent. Longer term, they should be able to reach at least 3 and perhaps 4 per cent. If that is allied to sales growth, the scope for profits could be dramatic. The shares look an exciting investment at 155p on a p/e that should fall to around 13 on expected 1994 earnings.

A third company that impressed the stock market with its figures and looks to have good prospects is Vinten Group at 436p. Results for the first half of 1993 showed a loss at the Suffolk-based group, but that was after a pounds 7.3m provision to reflect the cost of selling a US defence business; before provisions, trading profits rose by 23.8 per cent to pounds 6m.

The defence sale in effect completed Vinten's transformation from a military equipment company - which boomed in the 1970s but stagnated in the 1980s - to a world leader in the supply of equipment to the broadcast and professional camera market.

The later stages of Vinten's transformation have taken place under the leadership of Malcolm Baggott, who joined the company three years ago. In the past year, he has bought a US rival to Vinten's subsidiary supplying computer-controlled camera systems, and the group's US distributor. Both these deals are expected to enhance earnings during the current year, in which the group is achieving good growth. As Mr Baggott says, if worldwide growth resumed, earnings would roar ahead. The shares look excellent value on a p/e around 17 on likely 1993 earnings.