Bottom Line: Cray is transformed at the cutting edge

A MORE than satisfying 49 per cent increase in profits before tax at Cray, to pounds 26.2m in the year to April, confirms the success of the management team led by Roger Holland in transforming a declining company into a technological growth stock.

The acquisition of P-E and disposal of its defence arm, Cray Technology, clutter the accounts. However, operating profits from continuing operations rose 53 per cent to pounds 25.8m as continuing sales increased from pounds 162m to pounds 244m.

The group raised the overseas proportion of sales from 36 per cent to 42 per cent and is aiming for 50 per cent through its new network of European offices.

Data communications products account for two-thirds of turnover. High spending on research and development - pounds 27m last year - has given Cray an enviable position as Europe's biggest data communications company.

Even though it is little over half the size of its smallest US competitor, it has probably achieved critical mass.

Its products are also at the cutting edge in an area where technology changes at the speed of sound. The next launch in the pipeline, ATM, is a high-speed switching network that will make data transmission faster and more flexible.

Cray's software division is only middling in size compared to the independently listed software companies. Yet, with information technology consultancy provided by the P-E acquisition, it puts Cray in a strong position to compete against consultants such as Ernst & Young and the ranks of computer services companies for big systems contracts.

The management has turned inherited debt of pounds 50m in 1990 to net cash of pounds 15.6m at the end of April. Profit margins, excluding P-E, rose from 10 per cent to 13 per cent, and some analysts think they could reach 20 per cent within a year or two.

The shares, closing 2p higher at 170p, jumped in late December on takeover rumours. Suggestions that Cray would bid for Racal Electronics have faded with the realisation that Cray would not pay the current price. Profits of perhaps pounds 35m this year put the prospective p/e ratio at 17, reasonable enough in the circumstances.