Investment Column: Would-be high-flyer EIS remains firmly earthbound

The engineering group EIS makes much of the fact that profits never declined during the recession and indeed that it has now raised its results for 26 consecutive years. The problem is that much of that growth appears to have been achieved through uninspiring acquisitions, financed by dilutive share issues. Earnings per share, which only recently surpassed the 1990 peak of 28.2p, have gone nowhere.

Yesterday, the group compounded its dull record with a warning that it had been hit by the combined impact of depressed European markets and a strong pound. The news sent the shares crashing 32p to 312.5p, a level not seen for more than five years.

The 1996 figures accompanying the announcement suggested a year in line with recent form. Pre-tax profits rose 15 per cent to pounds 23.4m but share earnings barely moved.

The pounds 18m acquisition of Aerostructures Hamble at the end of 1995 still looks expensive. EIS admits the business, which has only just broken into profits, was in a shakier condition than it first thought and it is taking another pounds 5.2m write-off. It should have been well warned: Aerostructures, which makes the leading edge of wings for plane makers such as Boeing, was one of the worst in a string of disastrous new issues a few years ago.

But its strenuous efforts to get key contracts for Boeing's 737-700 and the McDonnell Douglas MD 80/90 back on track are being rewarded in much increased business. Production of four wing sets a month for Boeing is set to more than double to 10 by the end of the year and recent forecasts by Smiths Industries suggest output of the aircraft could double again by 1999.

EIS is strongly geared into the rising civil aviation market, which accounts for around 60 per cent of the pounds 252m sales out of the group's aircraft and precision engineering division. But the outlook for the other 40 per cent involved in defence is also increasingly rosy.

The other half of EIS, in oil, gas and petrochemicals engineering, is less exciting. The group claims to be attempting to move away from the sort of process engineering operation traditionally bedevilled by lumpy income and contract disputes. But its fluid seals and disc brakes arms suffered in this way last year.

Acquisitions, plus higher working capital requirements, sent gearing up to 44 per cent at the year end. The recent sale of the Technical Mouldings business should see that come back to a pro forma 25 per cent, cutting the interest bill, so profits of pounds 25m should be in sight for this year. That leaves the shares on a lowly forward p/e of 10. The fundamentals are there, but manage- ment looks in need of an infusion of new blood. Avoid.