Take a long view on Tomkins

Don't build on CRH while growth is limited; Wise to wait before buying back into Dechra

It has been a while since investors have been able to call Tomkins the "buns to guns" conglomerate. A series of divestments has left this sprawling business with neither Hovis nor Smith & Wesson. What is it now? "Pipes to wipe(r)s" is one rather poor effort at a new mnemonic. The company makes fuel hoses, valves, bath fittings, windscreen wipers, air conditioning fan belts, and thousands of other bits and pieces used in industry and construction across the globe.

The stock has outperformed the FTSE 100 by a wide margin since Jim Nicol arrived as chief executive last month, clutching a three-year pay deal worth up to £36m and plans to carry on with the reshaping of the group.

Things are going reasonably well, on the evidence of yesterday's final results. These only amounted to eight months of accounts, since the business is changing its year-end, and are as complicated as ever as a result of restructuring charges and effects. Underlying profit growth, as far as it can be divined, appears to have been 7 per cent.

The strongest performance came from the automotive and industrial division, thanks to robust car production. Where Tomkins shares have been weak in recent months, it has been on fears that a consumer slowdown could prompt a big fall in production.

Similar fears afflict the Air Systems division, which makes parts for air conditioning systems. It suffered a 6 per cent fall in sales because of a downturn in commercial construction in the US; a collapse in consumer confidence could undermine the current strength in sales to US housebuilders.

Mr Nicol's insistence on "lean manufacturing" is bearing results, with a modest increase in cash reserves over the eight months. The group has a good record in squeezing cash from its operations. Most importantly, the net cash position allows the chief executive up to £450m to spend on acquisitions – an enviable position at this point in the economic cycle, when many rivals are up to the eyes in debt and forced into asset disposals.

Tomkins robust financial position is the main argument for holding the shares despite the economic uncertainty and Tomkins' forecast of only a modest upturn in sales this year. It is a long-term winner yielding a 5 per cent dividend.

Don't build on CRH while growth is limited

CRH, the Irish building materials company, has constructed a reliable financial record. Yesterday's full-year results represented the group's 10th consecutive year of increased earnings per share. Meanwhile, the 3 per cent rise in operating profits and 4 per cent increase in earnings per share in the year to December compares with the sector average of minus 11 per cent.

Given the group has 60 per cent of its business in the US building materials market, which has been slowing down, and in the Republic of Ireland, which has been doing the same, this is no mean feat.

The rest of Europe came to CRH's aid, as did its continued appetite for acquisitions. The group snapped up another 45 companies last year for a total of €1bn (about £690m). A similar sum is expected to be spent in the current year, largely on smaller deals with privately controlled companies.

Another boost came from a good call on the market this time last year. CRH foresaw tougher times, reined in capital expenditure and reaped the benefits.

One of the clouds hanging over CRH has been its potential exposure to asbestos-related liabilities in the US. Indeed, the shares fell 15 per cent in September when the company said it had been named in asbestos litigation. But these claims now look limited. The company says its US products and distribution business received 251 claims by the end of September and a further eight since. Eight claims have been settled for a modest total cost of $5,800 (£3,660).

Analysts were buoyed by pre-tax profits of €856m, which was ahead of expectations and the 11 per cent increase in the dividend was also well received. All this pushed the shares up to €12.29 from €11.35.

The outlook is cautious, though, with the company expecting a reduction in activity in Ireland and weaker construction markets in the US. The shares trade on a forward price-earnings ratio of 9 but earnings growth looks limited this year. Not one to chase just now.

Wise to wait before buying back into Dechra

How long should you wait after a profit warning before buying back into a stock? There are plenty of stock market adages to advise against: don't try to catch a falling knife, perhaps, or profit warnings come in threes. All the old sages will tell you it is too early to buy into Dechra Pharmaceuticals.

The company is the UK's biggest distributor of veterinary medicines and also has a growing portfolio of its own drugs – including treatments for lame horses and weight loss in cats.

A devastating profit warning in January was blamed on a two-month downturn in the animal drugs market, which has since reversed; a tripling of its insurance premiums after two years in which they had been frozen; and the bungled integration of an acquisition.

In the six months to 31 December, although turnover was up 10 per cent to £92.4m, pre-tax profits fell 26 per cent to £2.6m. The company's shares fell another 2.5p to an all-time low of 47.5p.

There is a further question mark over the company, in the form of a Competition Commission investigation into the price of animal drugs. But although Dechra's 42 per cent share of the wholesale market was described as a "scale monopoly", the Commission seems more interested in regulating the vets themselves, who use big mark-ups on drugs to make up for a reluctance to charge for their own time.

Dechra shares look cheap on 5 times forecast earnings for the current year, and yesterday's results did suggest those forecasts are safe. But the company has much to do to counter the sudden hike in costs. A restructuring of the distribution business has only just begun and it would be wise to await evidence it is bearing fruit.