Investment Column: Market ready to forgive Filtronic

Filtronic Comtek, a maker of hi-tech parts for mobile telephones, well illustrates the dangers of investing in small companies. After a storming first year on the stock market, the company's heavy reliance on one customer, namely Motorola of the US, sent the company and its shares into a flat spin.

The problem centred on the code division multiple access technology on which Motorola has based its latest generation of digital mobile telephones. First technical hitches and now financing problems have slowed adoption of the technology in the huge US market. Given that over half Filtronic's sales are made to Motorola, it was hardly surprising the delay should lead to two profits warnings last year and an absence of first-half profits. Since then the group has gone on to lose its new chief executive, Greg Hey-Shipton.

But the market seems to be in a mood to forgive and forget, marking the shares up 19p to 394p yesterday after Filtronic unveiled pre-tax profits up a quarter to pounds 4.06m for the year to May.

The figures were in line with analysts' reduced expectations, but more importantly, the company remains bullish about the future. Orders have nearly doubled over the year to pounds 24.7m and have since risen to pounds 37m, nearly 80 per cent of last year's sales. Forecasts suggest the number of mobile phone chatterers could rise by 2.5 times to 500 million by 2002, yet analysts reckon Filtronic still has a lowly 6 to 7 per cent of its addressable market of around $1bn.

The group is gearing up to meet demand with a massive expansion of production in the UK, but claims gearing should not rise above the year-end figure of 45 per cent. Even so, the shares are high enough on a forward p/e of 25, assuming pounds 10.5m profits this year.