The Investment Column: BAT's sales growth sends out some positive smoke signals

Local Radio Company; Instore

Our view: Buy

Share price: 1,459p (-23p)

Given the run British American Tobacco shares have had over the past 12 months, investors could be forgiven for taking some profits from the stock yesterday. But even after this retreat, they are still up by about 25 per cent on the level seen this time last year.

Meanwhile, as figures from the world's second- biggest cigarette maker showed, the business is firing on all cylinders. BAT reported an 8 per cent rise in nine month profits to £2.1bn and assured investors that it is on track for a strong finish to 2006.

Despite smoking being on the wane in western Europe - following health warnings and government curbs - the company is still enjoying solid earnings growth thanks to its focus on selling cigarettes in emerging countries. This should continue for a long time to come.

The group said that volumes of its Kent brand grew 16 per cent, Dunhill increased 5 per cent and Pall Mall jumped 37 per cent although its Lucky Strike brand was down 4 per cent, mainly because of lower industry volumes in Germany and Japan.

Investors should use any weakness in BAT stock as a buying opportunity despite the fact that it trades at a premium to rival Gallaher.

Local Radio Company

Our view: Hold

Share price: 22.5p (+0.5p)

Richard Wheatley and Alistair Mackenzie turned Jazz FM into a successful brand and then sold it on to Guardian Media Group for £41m, pocketing a small fortune each. They hope to pull off the same trick with the Local Radio Company (LRC).

As the name suggests, the AIM-listed group owns a portfolio of local radio stations - 28 to be precise. And they are not the world's most exciting. They include the likes of Darlington's Alpha FM, Hastings' Arrow FM and Yorkshire Coast Radio.

But, there is logic to having them (and more in the future) under one roof. Not only does it provide financial discipline to each station, but as LRC grows larger, it gives local radio real clout when it comes to its dealings with the advertising industry. So, the bigger LRC gets the move advertising it should be able to attract. The fact that the group owns a national sales agency, in conjunction with partner UTV, greatly supports this process.

However, LRC has struggled of late and this is reflected by the group's shares which are a long way from their 90p issue price. To blame has been the weakness in the advertising market. In a trading statement this month, it unveiled a series of cost cutting measures and there is likely to be more in the near future. Management also warned that conditions remained tough for the company with little sign of a recovery in the sector.

Nevertheless, LRC has built up a good set of assets. Yesterday's listening figures show this. As does the fact that it was able to sell its loss making and under performing Win FM station, which serves Winchester, for £400,000 just last month.

Once the advertising market recovers, profits should start to motor thanks to LRC's high operational gearing - 75p in every pound of revenue goes straight to the bottom line after fixed costs have been paid.

Instore

Our view: Avoid

Share price: 27.75p (-1.75p)

Business is still dire at Instore, the owner of the high-street chain Poundstretcher.

Yesterday came yet another profit warning from the retail group. It said that losses this year will be a lot bigger than originally expected. This came along side a terrible set of interim results. Operating losses for the first half of the year increased from £4m to £9.7m.

City analysts had expected a deficit of around £3.5m for this year as a whole. They now expect a £6m loss. Sales do seem to be picking up at Instore. The company revealed a 7.4 per cent rise in like-for-like sales at both its Instore and Poundstretcher stores in the six months to August 26th.

But, this improvement is not going to do Instore's profit figure any good. And it is the only figure that really counts. Analysts expect a meagre £1m pre-tax profit from the company next year. Given Instore is valued at £63m presently, this leaves its shares looking very expensive.

Trevor Coates, who had a major success running cut price food chain Aldi in the UK, is the latest in a long list of chief executives who seems to be struggling to turn Instore around. Before him Angus Monro tried and failed. Mr Coates needs to show there is a place for his company in the overcrowded UK discount shop sector. He may succeed, but don't bet on it.