Shares: Geared to the long haul

The severity of the British recession and the growing worldwide one are sorting out the men from the boys in British industry. Weaker companies are being forced into dividend cuts and desperate cash conservation. But amid the gloom there gleam some beacons of achievement.

Three companies bucking the trend in the engineering sector are Siebe, Whessoe and Weir Group. This is reflected in ratings that are high by sector standards. Investors may feel that if these can do well in a tough climate, they may really start to fly when recovery starts.

There is a silver lining to recession for well-managed companies that enjoy the confidence of big institutional investors. These three are highly acquisitive and have used the downturn to make key acquisitions at prices which look good now and are going to look even better by the mid-1990s.

The FT engineering classification for these companies gives misleading overtones of factory grime and metal-bashing. Weir has long since disposed of its foundry interests; Siebe makes most of its money from highly sophisticated 'intelligent' controls; Whessoe has rapidly changed its spots from heavy engineering to precision controls.

Siebe fell out of favour last year, when it launched a huge rights issue to buy the US industrial controls group Foxboro for pounds 357m. Investors were unsure of the merits of the deal and were unsettled by worries that Siebe capitalised some of its research and development spending rather than charge it against profits. The company points out that only a part of the research and development spend relating to prototype development is capitalised and that rivals, such as Honeywell, account in the same way.

The Foxboro deal has evidently been a great success. Siebe's chairman, Barrie Stephens, the long-time architect of the group's success (earnings per share have climbed 115-fold since 1964 and nearly seven-fold in the Eighties) has been able to take huge chunks of cost out of Foxboro.

Two-thirds of profits now come from control equipment, and with electronics making all sorts of controls ever more 'intelligent', prospects for the shares, currently 713p to yield 3.4 per cent, look excellent.

Whessoe, under the leadership of the recently appointed chief executive, Chris Fleetwood, resembles Siebe in emphasising instruments and controls as its main business.

Fleetwood has closed down much of the group's nuclear and offshore oil module heavy engineering capacity, so enabling him to release large sums of cash once tied up as working capital and now to be used to build the systems and controls side, which accounts for 40 per cent of turnover compared to 10 per cent two years ago.

The latest rights-funded deal was the acquisition of a US company, Verec, which has made Whessoe joint world market leader with a Dutch company for 'intelligent' tank gauges. Short-run prospects for earnings per share are flat because of recession. The group is still working on a large pipe-work contract for the Sizewell nuclear power station which will not run much beyond next year. But while earnings per share may be moving sideways (a much better performance than many) the quality of those earnings is rising as it becomes less dependent on cyclical businesses.

The shares have come back from a peak 339p to 283p, where they yield 3.4 per cent and look well worth buying.

The Scotland-based Weir Group has come out of low-valued-added activities such as foundry work to concentrate on becoming recession-proof, by developing new markets for its world-beating pumps business under its managing director, Ron Garrick.

Each sector accounts for around a fifth of sales. Weakness in one area is offset by strength in another, so enabling the group to keep earnings per share moving forward. On prospects of earnings per share moving from 32.1p last year to 35p this year and 40p next, the shares look attractive at 543p.