Five stocks to watch in October


DS Smith manufactures corrugated paper packaging for companies such as Cadbury and Danone, as well as complementary plastic packaging - liquid packaging and dispensing products such as boxes for wine, for example.

Much of its output is retail ready, which means it will fit retail shelves or can be quickly converted into display cases but is strong enough to protect goods in transit. This gives DS Smith scope to add value - something that cannot be said of its commodity paper production for third parties, where it is scaling back. Innovations, the company says, are increasing the strength and reducing the weight of packaging, giving it an advantage over competitors.

The company has steadily increased its focus on packaging since Miles Roberts took over as chief executive in 2010. It acquired a French packaging company and disposed of Spicers, which makes stationery, and some paper mills. In June 2012 it took a big step towards European market leadership when, as the continent's third-largest producer of corrugated packaging, it took over SCA Packaging, the second. Smurfit Kappa is the biggest.

A focus on fast-moving consumer goods partly insulates DS Smith from the economic cycle, but variable paper and energy costs affect profitability.

The big question is whether specialisation will be sufficient to elevate corrugated packaging into a product customers are prepared to pay more for, enabling DS Smith to sustain high levels of profitability. Some patented designs may fall into this product category.

DS Smith could be a stalwart in the making, but investors already recognise that. The current earnings yield is only 5%


Renishaw makes sensors and probes that automate machine tools and guide motion control systems for manufacturers. Its Equator gauging system can guide a robotic arm that sorts bearings, for example, or inspect machined parts and recalibrate the lathe that produced them.

It also makes 3D printers, and has a new division applying its metrology (measurement) technologies to the manufacture of medical devices and robotic surgical procedures.

Renishaw's products are technically advanced and patented, so they are difficult to copy. The firm has become a global leader, growing as it establishes novel applications in new industries.

In 2013 the company spent more than 10% of revenue on new product research and development. In the short run, the cost of this can reduce profitability, but it should help maintain the company's technical lead and increase profits for shareholders in the long term.

The company also attributes its success to the quality of its products and close relationships with customers.

Renishaw's profitability was severely reduced when manufacturers ceased investing during the credit crunch. However, its automation products improve the efficiency of existing machinery and enable manufacturers to defer investment, so the company has performed well since.

The extension of Renishaw's technologies into healthcare is risky because it requires high levels of investment to meet exacting surgical and regulatory requirements, although the company argues this makes life difficult for competitors too. It will be some time before investors know if the investment is paying off.

Renishaw is growing from a position of financial and commercial strength. On an earnings yield of 6%, the share price is not cheap, but the business has potential.


Flybe could be on the brink. The company is the UK's leading regional airline, with 55% of the domestic market outside London and 29% including London. It operates a joint venture with Finnair, Flybe Finland Oy - a commuter airline that also flies planes for other airlines under contract, and provides aircraft maintenance and training.

The company, which made headline-grabbing losses in 2012, has struggled, while other UK airlines have prospered, because its business clientele is flying less.

More than halfway through an 18-month recovery plan, hopes are pinned on Saad Hammad, the new chief executive, and Paul Simmons, who becomes new chief operating officer at the end of October. Both men had senior roles at easyJet and will probably focus on the basics: higher utilisation, lower fares, courting more profitable leisure travellers and a more judicial selection of routes.

Flybe has already made significant redundancies, deferred the delivery of 14 aircraft for about four years and sold all its Gatwick arrival and departure slots to easyJet after costs doubled and they became uneconomic to operate. But this means Flybe is fast becoming a regional airline that doesn't serve the UK's wealthiest region: London. Its only activity close to the capital is its operation at Luton, from where it flies to Glasgow, the Isle of Man and Jersey.

Reportedly, Flybe has sufficient cash to last a year and the business expects to benefit from considerable cost savings after the action it has taken. But its debt is high and its lease obligations onerous. Unless the company is much closer to breaking even next summer, it's hard to imagine a future for the airline.

Experienced new managers well-versed in the strategies of rivals could turn Flybe around, but the airline industry is competitive and survival is far from guaranteed.


Publishing Technology has developed software for digital publishers derived from its print publishing software, which enables publishers to edit, produce and market publications as well as manage royalties.

The print software, author2reader, and a portal selling academic journals, ingentaconnect, are still in demand from publishers, but the company's emphasis is on two new products. Two big publishers, HarperCollins and McGraw Hill, have licensed implementations of "advance", a digital version of author2reader, while pub2web, inspired by ingentaconnect, hosts websites for many businesses and organisations that publish and sell online journals.

When advance was launched in 2012, most revenue came from implementing the software for publishers. However, the licences earn recurring revenues that Publishing Technology now expects to build up as it adds new customers.

Diversifying away from journal publishing into books and from print to digital has opened up new growth opportunities for the company, but years of investment when the company was barely profitable have left it with considerable debt. If the new products are not taken up by more publishers or the company doesn't make the savings it expects now development investment is complete, it could be in difficulties.

At the half-year reported in July, revenues had only increased 8%, although advance and pub2web both did much better, growing 48 and 73% respectively. It's not a safe bet by any means, and as it begins to commercialise many years of investment, its earnings yield of 2% tells us very little; but eye-catching deals with major publishers suggest Publishing Technology is worth watching.


Immunodiagnostic Systems Holdings is banking on automation. It supplies an automated assay system and manual assay kits. Assays are tests that determine the presence and quantity of a substance in another substance - vitamin D in blood, for example.

IDH has been highly dependent on sales of manual tests for vitamin D and - despite supplying the most accurate assay, 25OH vitamin D - its revenues have declined as rivals have entered this very profitable market with automated testing products. Customers - reference laboratories used by doctors and clinical research laboratories - increasingly prefer automated platforms.

A strategic review in 2012 addressed this competition, and a new strategy was drawn up emphasising the company's platform, IDS-iSYS, launched in 2009 and now responsible for 37% of sales. The appeal of the system depends on the range of tests it offers and the inclusion of niche assays not widely available from competitors.

IDS-iSYS has 13 assays, fewer than rival systems, but Immunodiagnostics is increasing the number through development, partnership and acquisition. It is developing the next version of IDS-iSYS, which will be cheaper, smaller and hopefully more competitive, with a French company, Stago. For its part, Stago gains the exclusive right to market the system and assays in its core haematology market.

IDH's strategy may be a winning one, but it's starting from a position of weakness with a relatively modest platform. Alone, it probably hasn't the strength to develop IDS-iSYS and a full range of assays to a scale that will allow it to compete with much bigger and better-resourced companies such as Roche and Siemens.

The company has no debt, but its underlying level of profitability is difficult to ascertain because of its changing business model. Competitive pressure has halved profitability since 2011.

The earnings yield of 10% might be attractive. But it comes at some risk.