De la Rue looks fully valued as the sum of inconsistent parts

With the FTSE 100 stuck firmly in a rut following its recent rally, investors are eyeing up smaller, lower profile stocks such as De la Rue. For starters, City pundits reckon it is only a matter of time before mid-cap stocks stage a stunning comeback of their own. What's more, De la Rue, the world's largest non-government printer of banknotes, occupies the in-vogue support services sector.

If only it were that simple. On the inside, De la Rue is a less cohesive business, although a reorganisation programme instigated by Ian Much, the chief executive, has at least removed its former "troubled" status.

De la Rue's main source of revenue is from the sale of systems that sort and authenticate cash. That's going gangbusters. Customers range from central and high street banks, post offices and building societies, through to supermarkets such as J Sainsbury that need to cut the cost of cash-handling. Yesterday's interims show sales from continuing operations here up 23 per cent, at £147.8m, with acquisitions adding £20.9m more. Mr Much cautioned investors against expecting a repeat of this stellar performance in the second half, but he believes the stock market underestimates prospects for sales in three years' time. The orders are flowing in and recent acquisitions have yet to bear fruit. De la Rue is targeting sales of £400m from the division come 2004.

Elsewhere the outlook is cloudier. The higher-margin banknote printing operation, which despite lower sales contributes the bulk of profits, has been hit by the deferment of orders from India's Central Bank. They are unlikely to resume before 2003. There was a further impact from moves to switch production of banknote threads to another facility.

De la Rue's third leg, "global services" (identification systems and the embossing of cards with holographic images), has had to contend with its own operational problems. News of a £2.7m half year loss here surprised many yesterday, sending the shares down 25.5p to 482p – well off a high of 535p earlier this month. Analysts now expect pre-tax profits of about £92m in the full year.

Mr Much is brimming with confidence that the overall market for De la Rue's products has plenty of pent-up growth. He wants to drive consolidation in the cash systems industry and has £200m earmarked for a handful of acquisitions. But until De la Rue manages to deliver consistently across the board it is hard to the see the shares outperforming. They are fully valued.

Enterprise Inns

Forget the big names of old, the Basses, the Scottish & Newcastles, the Whitbreads. The biggest quoted pub owner in the UK is Enterprise Inns. It has been snaffling up pubs as they come on the market, and now boasts a portfolio of 3,500.

And it has been squeezing out some impressive profit growth at the pubs it takes on. These benefit because the group can buy in supplies on favourable terms and boost the number of brands being sold. Throughout the portfolio, Enterprise has a good record in giving its pubs a makeover to improve trade. Operating profit was up an average of 12 per cent at its pubs in the year to 30 September.

Overall, group profits before tax and exceptionals were up 25 per cent to £62.6m, boosted by a judicious policy of selling the weaker pubs.

But maybe this is about as good as it gets. The acquisitions this year of 431 pubs from Scottish & Newcastle and 439 from Morgan Grenfell have been successfully integrated, with more than half the existing managers converting to tenants. But the deals have left Enterprise with a pretty stretched balance sheet, and interest payments are only 2.5 times covered by cashflow. That means any big acquisition from here would almost certainly require a rights issue.

That's a prospect that could hold back the shares, down 8p from their all-time high to 653.5p. The proposed flotation of Punch Taverns' bigger pub estate next year is also a worry. Though Enterprise's premium to the rest of the sector is well deserved, investors would be prudent to take profits.

Nord Anglia

Nord Anglia's business is education, education, education. It once ran language schools, now operates nurseries, has made several acquisitions to boost its support services and teacher training business, is winding down its failed School of Finance and Management, bidding for a military training contract overseas, and trying to sell its non-core accountancy tuition business. The group is fizzing with ideas, many of them good.

It is in a sexy area, with the Government pushing greater involvement of the private sector in the education system, but competition is fierce and bidding for contracts is expensive. Nord Anglia shares were unmoved at 292.5p yesterday by news that pre-tax, pre-exceptional profit was up 9 per cent to £4m in the year to 31 August. On 20 times forecasts of this year's earnings, the share price takes a lot on trust. Avoid.