Inchcape's stock is set to go up to a higher gear

Good value in Ultra Electronics; Baltimore Technologies looks risky

To understand the future prospects for Inchcape, one of the UK's largest car dealerships, you'll need a crash course in the Block Exemption, which has got everyone very excited. This is the exemption from normal European competition laws which, long ago, was granted to protect the dinosaurs of European car manufacturing. The car makers consequently have enormous power to dictate how and where their cars are sold, through which dealers and with what conditions.

Until October. Then the European Union will be introducing changes to the Block Exemption which will reduce the car makers' power from enormous to just quite large. It will be more difficult for manufacturers to terminate supply deals, while the dealers will be able to decide where to set up showrooms and whether to offer a mix of sales and after-sales services such as repairs.

To take full advantage of this potential power shift, Inchcape and its rivals need to bulk up, buying new dealerships that will give them greater financial muscle and more flexibility. And Inchcape looks in a pretty good position as far as that is concerned. With no material debt, a decent overdraft in place and a clear idea of what it wants its business to be like, it should be a clear medium-term winner. Despite having tripled since the start of 2001, Inchcape's shares, on less that 8 times this year's forecast earnings, are cheap enough for investors to get in on the action.

The trading performance revealed with interim figures yesterday was impressive across most of the group's territories. In recent years it has focused on the markets where it has a strong presence. It is also focusing intently on the quality end of the market, through its relationships with Ferrari, Jaguar, Land Rover and others. Underlying profits rose 7 per cent to £57m.

The risk is that a sharp consumer slowdown will hit new car sales in the UK while it is still pumping money into new ventures, such as fleet management, which aims to look after and service company cars for big corporations. Profitability at these start-up ventures appears to have been pushed back into 2004.

But the shares, up 3.5p to 711p, should be higher, even allowing for those risks. With the regulatory shake-up imminent, the stock should move into a higher gear. Buy.

Good value in Ultra Electronics

In these times of economic and geopolitical uncertainty, investors looking for a defensive investment need look no further than the defence sector. The US is already spending heavily on upgrading its military capabilities and last month's Comprehensive Spending Review promised the UK Government will do the same over the next three years. Both countries are focusing on "network-centric" military investments, upgrading communications systems and other technologies to help co-ordinate operations. And that means strong orders for Ultra Electronics, one of the experts in this field.

Ultra's results for the six months to 30 June were remarkable for showing 9 per cent growth in turnover and a 12 per cent rise in pre-tax profits to £12m – all despite an 18 per cent slump in sales to the civil aerospace industry, which has been mothballing aircraft since 11 September and consequently needs fewer spare parts and repair work. Ultra is not predicting any upturn in this part of its business for at least 18 months.

Yet its order book is a healthy £360m, or thereabouts, and the company saw scope to increase its interim dividend by almost 9 per cent, thanks to strong cash flows. Up 3.5p to 413p yesterday, the shares should yield dividend payouts of almost 3 per cent this year.

Longer term, the prospects are mixed. The company has a lucrative sideline in software for airport information systems, which power flight information screens, and it already has the contract for Heathrow's Terminal 5. On the other hand, the defence side may not look so rosy in a couple of years if falling tax receipts prompt governments around the world to pare back defence spending.

For now, though, the shares have fallen back to a level that represents good value.

Baltimore Technologies looks risky

Baltimore Technologies, the internet security group, has provided stock market watchers with one of the most captivating riches-to-rags stories of the past few years. It has not ended in tragedy. But it is still too early to write that it will end "happily ever after".

The company's glory days, when it boasted a place in the FTSE 100 index and when its technology was famously used by Bill Clinton, now seem little more than a fairy tale. For the past year, the company has been living a horror story. A string of profit warnings, and an admission that some revenues had been overstated, left it battling to stay in business.

Bijan Khezri, parachuted in to replace Fran Rooney as chief executive about a year ago, was tasked with sorting the whole sorry mess out and steering Baltimore to break-even before its cash ran dry.

An update yesterday shows Mr Khezri is making steps in the right direction. The prediction that revenues for the six months to 30 June will be between £21.5m and £22.5m was in line with expectations.

Good progress is being made on its restructuring, an exercise which has already seen Baltimore's workforce slashed to 400 from 1,400.

The cash pile of £23.1m, should see it through to break-even, which is now expected in the first quarter of next year. The company is also due to receive £1m from the sale of some Japanese businesses.

Analysts predict Baltimore will make an operating loss of £30m this year. As economic hardships continue, its customers are still reluctant to splash out on software. On that basis alone, the shares (up 1.6p to 7.5p yesterday) are still only for the brave.