Airtours shares flying too high

Investing in Airtours is rather like booking a last minute package holiday. It may be cheap but you must be prepared for disappointment.

Airtours looks to have reached a maximum cruising height with its third-quarter figures yesterday. In the three months to 30 June, it turned a pre-tax loss of £2m a year earlier into £4.2m profit. Crucially, it managed to narrow losses in its German unit, FTi, to £15.2m, and is on schedule to reduce full-year losses to £40m from £100m last year. E-commerce costs, exceptionals and goodwill aside, Airtours successfully landed a £24.5m increase in operating profit to £26.6m for the third quarter. Sales surged 38 per cent to £1.4bn from £1bn.

For the time being, Tim Byrne, the chief executive, is in holiday mood. The UK is looking good, with supply and demand "nicely balanced". In Scandinavia, Airtours avoided the overstocking that forced rival Kuoni to sell last minute holidays at giveaway prices.

But this is as good as it gets for now. Tour operator's earnings suffer from poor visibility and Airtours' guidance for next year will only come in the fourth quarter. Investors should heed the flashing fasten-seat-belt sign. There could be turbulence to come.

In the US, figures showed that customers are already feeling the pinch of the economic downturn. Mr Byrne found an upside for Airtours: the soft economy helps its US expansion strategy, as it can snap up bolt-on acquisitions at throwaway prices and capture a bigger chunk of the $600bn-a-year US holiday market. Airtours, though, does not have a great record on successful acquisitions – remember the failed bid for First Choice in 1999 – and the group is pinning too much on a territory it does not know too well.

Airtours shares gained 11p to 247p yesterday but historically drift in the second half. On a forward price/earnings ratio of around 12 times for this year, falling to eight next, it looks as tempting as the last minute deals it prefers not to sell. But the risks are high and there will be better times to buy.

Innovation Group

The Innovation Group – TiG to its many friends in the City – is one software company that has never disappointed at results time. Until yesterday. Third-quarter turnover of £14.3m and earnings per share of 1.9p were ahead of expectations, and yet TiG shares fell more than 21 per cent.

The reason? Analysts were told that Mike O'Leary – ex of Misys and chief executive of Huon, which TiG bought earlier this year – is not staying with the group. It is a blow: Mr O'Leary would be an asset to an inexperienced management battling against scepticism of the sector. But it is not the end of the world and the company went on record yesterday to insist the split is amicable.

TiG is in a healthy niche in the tech sector. It sells management software to the notoriously inefficient insurance industry, at a time when insurers are seeing competition ease, premium income rise and profit growth speeding ahead. There is no major IT overspend to correct in that industry, and TiG maintained yesterday that its customers are not hesitating any longer than usual before making spending decisions.

Meanwhile, a string of recent acquisitions is providing cross-selling chances, and impressive new US licence sales will eventually translate into recurring support services revenue. The house broker predicts £17.8m profit this year and £45m in 2002. At 305p, the shares are on 30 times this year's earnings, 15 times next. For a company growing at 150 per cent, that must be cheap.

Rotork

When the world's largest oil rig blew up off the coast of Brazil, killing 11 workers in March, Rotork watched a £1.3m contract sink to the bottom of the sea. It was an explosive end to a period when the oil industry has been a malign influence on the Bath-based engineer.

Cutbacks in spending across the industry in 1999 hit Rotork's core business selling actuators, the gadgets controlling valves inside pipelines. Its fluid systems business, which is most exposed to oil and gas company spending, has only now crawled back to break even.

Rotork has done all the right things to turn the situation around. It has increased outsourcing of components for its actuators, launched a higher-margin product range, and promised to focus its sales effort on the US power generation industry, which is entering a period of high expenditure after the Californian energy crisis came to a head.

Interim figures came in as expected yesterday, in spite of component supply problems. Sales grew 10.6 per cent to £57.5m and pre-tax profits, before goodwill, were up 9.5 per cent to £11.5m. The stock, up 2p to 373.5p, is on 18 times Old Mutual's forecast profits of £25.6m for the full-year. That's a deserved premium to the engineering sector but means the stock is fully valued.