Builders McCarthy & Stone worth keeping in your retirement fund

Hi-tech warfare proves a boost to Radstone; Recycling regulations to benefit Wincanton

Most elderly widows would baulk at being referred to as cash cows. But for McCarthy & Stone, the retirement homes builder, that's exactly what they are. The group has captured a lucrative niche providing pensioners with somewhere to live that is a halfway house between living alone and in a nursing home. Residents can have handymen, gardeners and cleaners on tap, plus the security of 24-hour helplines and a ready-made social life to boot.

Indeed, as people live longer and the retired make up a bigger proportion of the population, life looks rosier and rosier for the Bournemouth-based housebuilder under Keith Lovelock, the chief executive and deputy chairman.

This was evident yesterday from full-year results that showed pre-tax profits to 31 August ahead by 25 per cent at £75.4m. Turnover was up 12 per cent at £187.8m. Like other mainstream housebuilders, McCarthy & Stone has prospered from soaring house prices on the back of interest rates at record lows.

On top of this, the group's operating margin is more than three times the sector's average. Before it can sell a single granny flat, the whole development must be finished and all builders' tools carefully tidied away. This means it can lock in prices for land, labour and other associated building costs at 1999's prices, while selling the finished flats at the inflated rates of 2002. Last year the average selling price rose to £112,000 from £99,000, helping operating margins to soar by 4 percentage points to 40.4 per cent – they even hit 43.4 per cent in the second half. But this won't last given the rising cost of land to build on.

Although the group is well set up for the next couple of years, helped in part by strong enquiry levels and one of the healthiest land banks in the industry (which gives it enough land to last it five years), things could turn nastier if the current house price bubble bursts. Because its customers are typically "trading down" to raise a lump sum from their existing house, they are much less likely to make the move if the market is weak.

That said, the group is in much better shape financially to cope with a downturn than it was last time round in the early Nineties. Its debt and gearing are very low and it is a much leaner operation. The shares, flat at 339p, have had a good run this year but are still a solid hold.

Hi-tech warfare proves a boost to Radstone

The CIA assassination of al-Qa'ida suspects in Yemen at the weekend, using missiles launched from a remote-controlled plane, was something of an advertising coup for Radstone Technology. It makes the computer equipment that enables such "smart" hardware to work and is back in the black thanks to lucrative contracts with the military-minded US government.

Last year's wobble is behind it. The hiatus caused by a defence spending review pushed the group to a loss of £1m in the six months to September 2001, but the same period this year yielded pre-tax profits of £675,000. Most of the recovery is down to extra sales, although there was also good news on margins. The group has cut costs at its struggling contract manufacturing division, which accounts for 30 per cent of sales.

The group has been able to jack up spending on research and development now that top-quality engineers are no longer being snaffled to work in the telecoms industry. That should pay off in the long run, but contributes an increase in costs for now. There could also be an interruption to new orders if a war on Iraq goes ahead.

Against that is the prospect of sales to India, China and Turkey where Radstone has been developing relationships.

Warfare is such that Radstone's embedded computer expertise is moving to the mainstream of defence spending. Forward orders of £75m give confidence. The shares, up 6.5p to 261.5p, trade on 16 times this year's earnings, falling to 13 times next year. Fair value.

Recycling regulations to benefit Wincanton

Someone is going to have to move the fridge mountain, and Wincanton hopes to be the group to do it. Old fridges have been proving a headache, since they need to be recycled rather than simply dumped and new regulations will put the onus on retailers to organise their recovery and recycling from 2005.

In fact, it is not just fridges, but all electrical goods, and that has created an opportunity that Wincanton calls "reverse logistics". Logistics, the distribution of goods, is already Wincanton's forte, through its network of warehouses and haulage divisions; reverse logistics, the recovery of goods, could prove a lucrative long-term niche and the group set up a joint venture yesterday with the US market leaders in the field, Genco.

It was just another little example of the solidity of Wincanton's strategic thinking. The company has won plaudits since being spun out of Uniq last year, and yesterday fielded another robust set of figures. In the six months to 30 September, pre-tax profits (before exceptional items) were up 11 per cent to £13.8m.

Wincanton has escaped the share price slump suffered by some of its bigger sectormates because it is solely focused on the UK and has half its business in consumer goods, which have not been affected by the industrial recession. If there is a big downturn in consumer spending, Wincanton could take a small hit, but many of its contracts are on a management fee basis, rather than being volume weighted. It should remain relatively robust.

In the longer term, the company is well placed with an impressive list of clients, including Safeway, Tesco, Comet, Argos and now Procter & Gamble. It should also be able to exploit the change in retailers' buying habits, which sees them buying goods at the factory gate at reduced prices, rather than waiting for the producer to deliver. That means more work for Wincanton and, with a share price of 213.5p putting it on a price-earnings multiple of 11 times, it is worth holding.