Wimpey's foundations look risky

Sometimes the City is never satisfied. George Wimpey, the UK's second-biggest housebuilder by stock market value, delivered an 88 per cent leap in pre-tax profits yesterday, in line with forecasts, yet its shares slipped back. "These numbers were expected to be better than expectations," one analyst said. "Some of Wimpey's rivals have smashed the forecasts and effectively delivered the 2003 forecast a year early," another said.

All this is a little unfair: Wimpey is making its share of the money from the UK's booming housing market and has already sold about two-fifths of the homes it needs to meet 2003 sales forecasts.

It also had good news on margins at its main UK business, up from 12.4 per cent in 2001 to 14 per cent last year, a good move towards the sector average of about 16 per cent. The company has cut costs and made progress with its land bank, which can now supply plots for more than three years of new building, and which has been bought in at much more attractive levels than before.

It is too early still to write off the housebuilding sector as an investment. A wholesale crash is only one possibility, and not yet the consensus view. Demographic changes are increasing the demand for housing and even more liberal planning laws won't address the supply shortage fully. In the shorter term, unemployment is low and mortgages are cheap, and neither situation is likely to reverse quickly. Wimpey forecasts inflation of 3 to 5 per cent this year, down from their estimate of 10 per cent last year. Most housebuilders reject the mortgage industry's figures of 20-plus percentage point growth last year, on which is based the notion of a bubble.

So there is no case yet for selling Wimpey shares. In the nervous climate, though, new investors will find other investments in the sector more attractive. The shares trade on a meagre 4.5 times forecast 2003 earnings, well below the sector average, for a good reason: it is one of the higher risk investments available.

In November it bought Laing Homes for £297m, so there is integration risk. Laing also gives it a much greater exposure to London and the South-east and what it calls the "premium not luxury" market that is most at risk from slowdown. And many analysts believe that margin improvement will get harder in the coming year. Only a hold.

Time to check out of Millennium & Copthorne

It seems clear that the international hotels industry is heading into a second downturn, and investors would be wise to wait for signs of things stabilising before checking in again at the likes of Millennium & Copthorne Hotels.

There has been no pick-up to speak of in the lucrative corporate business that used to make M&C an attractive investment proposition. And now the consumer could be set for a crisis of confidence – the confidence to travel because of a war in Iraq and the confidence to spend because of renewed economic doomsaying.

The 2002 results posted by M&C yesterday reflected a modest rebound after a year hit by the attacks of 11 September which closed its Millennium Hilton in New York. Pre-tax profit of £60.2m was up £5.8m.

But the latest trading news, in common with that from a number of its peers, was poor. Group revenue per available room (the key industry measure) was down 2 per cent – with falls of 9 per cent and 7 per cent in New York and London respectively. Cazenove had to erase all the profit gains it had previously been forecasting for 2003, which now looks like being a flat year.

A fact not reflected in M&C shares. Although down 2.5p to 196.5p yesterday, they still trade on a forward price-earnings ratio of 15. That anticipates a trading recovery that is simply not in evidence. Sell.

Balfour Beatty strength at home offsets US woes

Balfour Beatty is one of the top three construction and engineering groups in this country and it is a class act.

There were a couple of hiccups in the 2002 results, reported yesterday, but the overall picture is of a group competing well in good markets. While private-sector expenditure is down, Balfour Beatty gets 80 per cent of its revenues by working for the state or quasi-state bodies. It is probably the leading player in the private finance initiative/public private partnership market and it is part of the consortium that hopes shortly to take over much of the London Underground network.

Before exceptional items, profit was up 16 per cent at £118m for 2002, but after exceptionals, pre-tax profits were down. One problem revealed yesterday, which required a "significant" provision, is that some of its big US engineering projects have cost over-runs. The company will try to recover these extra costs in time but the news spooked the City – particularly since an exact figure was never given. Also, a customer of its Barking power station went bust, meaning it loses out on an attractively priced contract to sell electricity at above market prices.

These things aside, Balfour Beatty has an order book of £5.1bn. The British government continues to outsource infrastructure work via the PFI, such as road-building, and Network Rail, the successor to Railtrack, ought to provide large quantities of work for Balfour Beatty – the largest rail maintenance player.

The group is ambitious and came close to a big acquisition in the US last year. But risks are limited by the fact that the group has a policy of carrying no debt. Its shares closed down 5p at 154p, putting the stock on a forward multiple of about nine. That's a little ahead of an out-of-favour sector. Hold.