Time for the cautious investor to cash in on Signet's sparkle

There was another rock solid set of results from Signet yesterday. Britons' new taste for diamonds boosted profits at the jewellery empire once known as Ratners, owner of H Samuel and Ernest Jones, and definitely not purveyors of "crap" any more.

The group reaps most of its sales in the US these days, and is one of the fastest-expanding companies in the retail sector. Its 1,025 US stores performed solidly despite the grim economic conditions and the events of 11 September, which kept consumer confidence low. In the end, underlying sales growth, stripping out new selling space, was 0.6 per cent, but operating profits rose nigh on 10 per cent.

The company still has just a 7 per cent share of the market in the US, so there is plenty of scope to open or acquire new stores. In particular, Signet is rolling out its Jared jewellery superstore chain, which should boost US selling space by 10 per cent this year. The group is happily unconstrained by cash worries, and debt levels are easily manageable.

Terry Burman, chief executive, boasts that Signet has now proved itself resilient against consumer confidence wobbles on both sides of the Atlantic, in the UK in 1998 and the US last year. He said it looks as if Signet is through the worst in the US and suggested current sales there are running higher than this time last year.

The guidance being given yesterday on trading across the group was that the new financial year has started well, and analysts tended to move their figures higher as a result. A fuller trading update will be given within a month.

The UK already has as many jewellery stores as it can handle and Signet does not expect to expand much beyond its current 606 outlets. The focus here is on wringing more from the existing stores. Last year, the group sold more expensive diamonds than ever before, reflecting their increasing appeal as gifts and fashion accessories. This year, the focus will be on new marketing initiatives, and a "special offer" deal with a big retailer is tipped to be signed by the end of next month. The group is also considering television and radio advertising.

UK operating profits were up 21 per cent in the year to January, thanks to the buoyant conditions on the high street. But how long will it last? That is the one cloud over the stock, which could be hit hard if consumer confidence takes a dip in response to tax hikes in the Budget or interest rate rises later in the year.

Cautious investors may want to take some of their recent profits at this point, with the shares up 7.5p to a post-Ratner record of 125.5p. The speed of the rally, which has outpaced the soaraway retail sector as a whole, was down to the shares' previous undervaluation. Now, though, with the stock on 16.5 times forecasts of the coming year's earnings, it is back on a rating in line with the sector average. It deserves a premium, both for its US expansion opportunities and for the strength of its management, but that might come about as the rest of the sector falls back.

Robotic Technology Systems

By definition, a profit warning comes as a surprise. But some warnings are more surprising than others, and the one from Robotic Technology Systems last May came just four weeks after management said it was comfortable with forecasts and trading was robust in its crucial US market. Profit warnings which lop a third from the market's revenue forecast for the year should not come as that much of a surprise.

So RTS has a bit of a credibility gap, as far as investors are concerned. The group makes robot systems for automating factories, drug research departments, and the like, and had sales of £131.3m in 2001. That was down from £138.6m in 2000 and worse, much worse, than the £190m analysts had been promised a year ago.

There has been a manufacturing recession, so RTS can argue a profit of £3.1m, down 27 per cent, is respectable. The profit would have been £2.1m larger if only RTS Networks ­ spun off, lucratively, at the top of the boom ­ had not gone bust, taking RTS's remaining stake to zero.

Things are forecast to stay grim, with revenues down to £120m and underlying profits down another quarter in 2002.

The group is talking up its chances of winning sales in the giant US programme for clearing nuclear waste, and holding out the prospect of a rebound in its core markets. Last month was the best since July 2001 for new orders. And it said improved internal systems have helped management spot business trends, so it is less likely to be wrong than in the past.

We'll see. At 119p the stock may look cheap, even compared with the engineers its trading most closely resembles, but it deserves its rock-bottom rating. Avoid.

Pilkington's glass markets losing shine

It would be funny if it were not true. Financial statements from Pilkington habitually tell of weak demand, falling prices and stalled production, but yesterday's trading update set new a standard in detailing the renowned glassmaker's woes.

Glass demand is tied to the housing, construction and car markets. In almost every region of the world outside the UK the situation is grim in the extreme.

Falling demand in housing and construction has led to weaker glass prices in both Europe and the US. Pilkington's Mexican operations were bashed by the strength of the peso and cheap Asian imports. The Australian market started off badly and has improved only slightly.

Meanwhile, Pilkington has had to contend with falling global car production, in particular in Europe where delays to the introduction of new models dented profits in its largest single auto glass market.

The economic crisis and devaluation in Argentina has added to the pain. Overall, the second half of the last financial year was the worst "for several years", said its chief executive, Paolo Scaroni.

While Pilkington will have higher profits this year thanks to a longstanding efficiency programme, analysts still took the axe to forecasts yesterday. JP Morgan cut pre-tax profits for 2002 by £17m, to £210m, and its 2003 forecast by £19m to £220m, giving earnings per share of 8.8p and 9.3p respectively. The numbers don't count exceptional charges, which in Pilkington's case have become pretty usual and typically range between £35m and £40m.

The shares have been in retreat since touching a year-high of 121.5p last month, and slid 2.5p to 110p or 12 times forward earnings. Given uncertainty over the timing of any uplift in Pilkington's main markets, that is not particularly cheap.

All hope is not lost. Pilkington is among the leaders in "added value" glass, such as self-cleaning double-glazing, which it launched into five European markets last month. UK sales should start later in the year, and US interest is said to be strong. And to his credit, Mr Scaroni is addressing overcapacity by taking some of Pilkington's plants out of production.

That said, analysts expect the group's rivals to bring new capacity on stream in Europe this summer, so the newsflow regarding glass demand and prices is likely to be bad over the next three to six months. The shares are too risky.