Tomkins' good record ignored

When the market takes against a company, it can behave in a pretty illogical fashion. Its treatment of Tomkins, the highly successful buns- to-guns comglomerate, is a case in point - an enviable record, through thick and thin, has been rewarded with a stingy rating which shows little prospect of improving.

Results for the year to April showed Greg Hutchings is keeping up the good work. An 18 per cent increase in pre-tax profits to pounds 303m from sales 15 per cent better at pounds 3.73bn was in line with expectations but cash flow was stronger than ever, taking the group's war chest to almost pounds 300m and rising fast.

Tomkins boasts an impressive underlying return on capital employed, more than 40 per cent if you strip out the piffling interest it receives on its cash pile. Margins are rising across the board. Taking the long view, Tomkins looks even more impressive. Earnings per share have grown every year since 1984, notching up a compound growth rate of 34 per cent compared with the average of UK quoted companies of just 7.5 per cent. Dividends, up an average 29 per cent a year over the past 12 years, have grown three times as fast as the average.

Despite that proud record, the market rates the shares below both the rest of the diversified industrials sector and the market as a whole. They yield almost 10 per cent more than their peers and have moved sideways over the past three years compared with a 25 per cent rise in the FT-SE All-Share index.

Partly, the market is fretting about Tomkins' exposure to the US, where half of profits are made and the economy is showing worrying signs of flagging. Partly, the problem is the fashionable mistrust of companies without a neatly describable focus.

But the real issue still seems to be a refusal to accept the acquisition of RHM, despite the obvious progress made in the two and a half years since the bread and food group was bought; that and an understandable reticence ahead of the next deal which, given the fast-growing bank balance, cannot be far away.

On the basis of forecast profits of pounds 332m this year and earnings per share of 19p, the shares stand on a prospective price-earnings ratio of 12 - a small price to pay for safe, high-quality earnings, but be prepared for a patient wait.