The Investment Column: Stormy outlook set to spoil Carnival's party

Keller Group; Harvey Nash

Our view: Avoid

Share price: 2213p (+28p)

As couples on both sides of the Atlantic mull over their post-Christmas bills and wonder where economies can be made, plans for that expensive cruise around the Caribbean must rank high on the hit list. But so far Carnival Corporation, which operates 89 luxury liners, sees no reason for any lifeboat drills. Advance bookings for the first half of 2008 are "well ahead" of last year, both in occupancy and prices, while the second six months is shaping up well.

However, the two sides of the business, created out of the 2003 merger of P&O Princess and the US giant Carnival, are likely to be cruising at a different rate of knots. The US, focussed on the Caribbean, and which still makes up the bulk of revenue, is increasing capacity by just 3 per cent on its routes. This is a sure sign that the weakening dollar and worries over the fall-out from the credit crunch will force people to find cheaper holidays.

In Europe, where there tend to be more well-off older people willing to splash out on a voyage of a lifetime, it is different. The European cruise operation is increasing capacity by 22 per cent, partly reflecting the introduction of Spanish line, Ibero Cruises.

Small wonder, then, that Carnival has just placed orders for six ships five for the European market, including a new 2,000-capacity Queen Elizabeth decked out in the famous Cunard livery.

The shares moved modestly ahead on the outlook for 2008, although one analyst churlishly reminded clients that the company had also been confident in December 2005 of prospects for 2006. By January it had softened its language, by March lowered its guidance, and by May issued a profit warning.

Carnival ended 2007 with final-quarter earnings 14 per cent weaker because of higher fuel costs, leaving full-year profits 6 per cent ahead at 1.2bn. For next year, fuel costs will rise by over 200m, although the company still expects earnings to rise. Having stung passengers with a fuel surcharge in November, it will be reluctant to impose more charges, especially if demand shows signs of weakening.

The shares have fallen 34 per cent since touching 33.97 last year. Too many uncertainties remain for them to be bought at this stage. Avoid.

Keller Group

Our view: Buy

Share price: 661p (+20.5p)

The engineering group Keller became a casualty of the US sub-prime fall-out over concerns that the slump in the housing market would spread to major construction projects. But the worries, which drove the price down 40 per cent from 1170p in mid-October, look overdone following a confident trading update showing a lengthening order book and confirmation that profits will be at the top end of forecasts.

Keller specialises in preparing the ground for major construction projects. It is building foundations for the 150-storey Chicago Spire, expected to become the tallest building in the US.

Around 20 per cent of its work is in the housebuilding industry, which initially triggered the alert in the market, but this seems to be stable at present. Elsewhere it is involved in schemes in the Middle East, while in the Canary Islands it has done emergency work to stabilise storm-damaged embankments in danger of collapsing on to housing.

Keller has benefited from the large number of big development schemes around the world which need complex foundation solutions. All four of its geographic regions are reporting higher order books, with work stretching to six months, compared with five months a year ago.

Keller will incur costs of under 10m in the year about to end for exiting its non-core social housing business, Makers, but results are still likely to come in at 102m.

The construction industry is always capable of springing surprises bad weather, for instance, can seriously delay work but Keller seems well placed for further growth next year, with potential to deliver around 107m, putting the shares on a multiple of 6.5. Solid value.

Harvey Nash

Our view: Buy

Share price: 54.5p (+1p )

Demand for skilled IT executives able to manage large-scale projects continues to drive performance of the recruitment specialist Harvey Nash.

Despite the recent financial turmoil, there has been no let-up across the US and Europe for top people, which has pushed up pay and Harvey Nash's fee income. In the three months to the end of October turnover rose by 28 per cent, with net fee income up by 23 per cent. Although the year end is not until January the company is comfortable enough with current trading to predict results in line with expectations, implying an outcome of 7.5m, up 15 per cent.

Strong cash flow has enabled it to reduce its short-term overdraft facility and make early loan repayments. Unless demand suddenly falls off a cliff the company should be able to deliver profits of 9.4m next year, leaving the shares trading on just six times earnings.

The company has the financial clout to mop up weaker rivals at attractive prices as experts predict more consolidation in the sector. Buy.