Is Wolseley over the worst? The stock market would seem to think so. Shares in the world’s largest plumbing supplier have risen by nearly three quarters from the eight-year low they touched in July – the day when the company announced the scrapping of its final dividend. Their latest advance, the biggest gain in the FTSE 100, came with yesterday’s full-year results – despite the mere indication that the deterioration in American and European construction markets that had brought the company so low is about to change.

The best that Wolseley could offer is that US commercial and industrial markets – many of which are still benefiting from capital commitments made in better days – are expected to remain stable for the next few months. The majority of its markets – principally those exposed to housebuilding – are set to deteriorate further in the short term. Even those that had held up well, such as Scandinavia, are now beginning to weaken.

If there was relief, it was twofold. First, Wolseley, often touted as a rights issue candidate, said that it did not need to raise fresh equity for now. Secondly, it has begun a “fundamental review” of Stock, its loss-making US building supplies business, where it has already cut four fifths of the workforce. With Stock falling £123 million into the red last year, Wolseley might struggle to find a buyer should it seek to sell the company outright, despite the division’s £1.5 billion of annual sales.

The more likely option is that Wolseley retains those territories with sound longer-term growth potential – for instance California, Florida and Texas, which are forecast to benefit from continued internal migration – and jettison those, such as the upper Midwest, thought to be in steady decline. The bigger comfort is that eliminating £123 million of losses will do much to bolster the ratios on which Wolseley’s banking covenants are calculated.

Much progress has already been made on that front. Tighter management of working capital, property disposals and a moratorium on acquisitions meant that the company was able to keep net debt steady at £2.5 billion – despite a £320 million rise in its reported borrowings from the appreciation of the euro. With Wolseley now being explicitly run for the maximisation of cash – a radical about-turn from its previous financial year, when it spent £1.7 billion on acquisitions – that burden should start to ease.

At 470p, or 12 times this year’s earnings, the shares provide a vivid illustration of the stock market’s willingness to discount more bad news: investors expect a recovery that Wolseley’s management has yet to detect. But with huge uncertainty surrounding the US Government’s bailout of its housing market, the UK still in the early stages of decline and hefty provisions a possibility, there will be better times to buy.

Aero Inventory

Alitalia and dozens of other airlines may be heading towards the brink, but Aero Inventory, the AIM-listed spare-parts specialist, is receiving “more enquiries for new business than ever before”. That apparent paradox is explained by the increased appeal of outsourcing to cash-strapped carriers. Under a typical contract, Aero buys an airline’s stock of warehoused inventory – everything from cabin fittings to fuel pumps – in return for a long-term supply contract. The airline realises cash and reduces overheads; Aero gets substantial economies of scale.

The model appears to be working. Yesterday’s full-year figures show earnings per share up 65 per cent on sales ahead 78 per cent. The dividend was raised 20 per cent. There were other signs of maturity. Its oldest contracts are now throwing off cash and its biggest (with Qantas) is starting to do so.

Last year’s tie-up with ACTS, a spin-off of Air Canada, is generating more sales than initially expected. The problem is that Aero needs to take on debt to fund start-up contracts and, with net borrowings at $391 million (£210 million), against a $500 million bank facility, it must tread carefully. Assuming that increasing cash generation will obviate the need for a rights issue, the shares – at 440p, or less than six times earnings, and half the level of June’s indicative (albeit withdrawn) offer from Bridgepoint – are worth hanging on to.

Clapham House

The comments that accompanied Clapham House’s profit warning last December look prescient. At a time when many restaurateurs were patting themselves on the back for their trading performance, the Tootsies and Gourmet Burger Kitchen (GBK) operator was scaling back openings in the light of fragile consumer confidence, rising food costs, its high net debt and poor sales at Tootsies units located in shopping centres. Since then, the economy has worsened and most rivals have fallen into line with its cautionary remarks.

The irony is that, having taken preemptive action, Clapham House is now trading as robustly as anyone. Yesterday’s second-quarter update has scant detail, although analysts believe that like-for-like sales for GBK are up by almost 10 per cent, while the Tootsies brand has made up lost ground and is now flat. The extra volume from the 23 new units opened last year allowed the group to offset the impact of food inflation by securing better terms from suppliers. Even with a reduced target of about ten openings a year, it will continue to reap purchasing benefits, while the sale of Bombay Bicycle Club has bolstered its balance sheet.

The shares – a quarter of which are held by Capricorn Ventures, the owner of rival Nando’s – rose 3½p to 90½p, or 16 times current-year earnings. That rating appears to be up with events, given the risk to profits from a further lurch downwards in consumer confidence. Hold.

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