Two days after Warren Buffett’s $34 billion bid for Burlington Northern underlined the long-term attractions of railways, Thursday’s first-half results from Invensys made much the same point.

Once again, it was the rail division of the FTSE 100 automation and controls group — which develops and installs signalling equipment and other trackside technology — that was the stand-out performer. At £73 million, the division’s operating profit for the six months to September 30 was 11 per cent ahead of consensus forecasts. The division’s operating margins also continue to improve — to 21.8 per cent, up from 21.2 per cent a year ago. True, orders were down 13 per cent but that owed more to last year’s boost from a contract for a high-speed line in Spain and a lull in procurement by Network Rail ahead of the next phase of track renewal.

Encouragingly, since the end of September, Invensys has made up that deficit — picking up its first big contract in Brazil (a £153 million deal to resignal three metro lines in São Paulo) and £41 million of upgrade work in America.

The broader reassurance is that spending on rail infrastructure — driven by worldwide moves to shift more freight by train, the construction of mass-transit systems in emerging markets and tightened safety standards — shows no signs of slowdown.

So why did Invensys’s shares fall 10 per cent at their worst? The culprit was operations management, the company’s biggest division, which makes and installs technology that helps processing plants — such as petrochemical facilities and power stations — to run at optimal efficiency. Orders dropped 23 per cent, sales fell 17 per cent and operating margins weakened from 9.6 per cent to 7 per cent. Spending cuts by oil and gas companies, especially in the US, are part of the explanation but the concern is that process equipment is the bit of Invensys in which the full effects of recession have yet to be felt. In short, it is a “late cycle” activity in which the long lead times behind big capital projects mean they have previously been protected from downturn.

For its part, Invensys remains sanguine. The company expects a stronger second-half trading period, such that it will still be able to meet full-year profit forecasts. Given Invensys’s recent record in reading its markets correctly, it should be given the benefit of the doubt. The underlying appeal is a company with a huge installed base of process equipment. Elsewhere, its controls divison, which makes timers and displays for consumer appliances, should be quick to benefit from cyclical recovery.

Invensys sits on net cash, now pays a dividend and, valued at £2.4 billion, is a small — and therefore eminently digestible — constituent in a sector dominated by US and European giants. At 290p, or 14 times next year’s earnings, the shares are a buy.

Segro

Segro, the industrial property developer once called Slough Estates, is clearly a canny seller. It disposed of its American operations in August 2007 for nearly $3 billion just as property markets peaked. But it is no slouch as a buyer either. That much is evident from this summer’s all-share bid for Brixton, its distressed smaller rival. That deal was lauded as bold by some at the time but, only a couple of months later, looks more certain to live up to its billing as a one-off chance at consolidation that was too good to miss.

Yesterday’s third-quarter trading update showed that Segro is on course to extract its targeted £12 million cost savings from the deal two months earlier than planned.

Bigger challenges remain. Not least Segro’s task in reducing Brixton’s persistently high proportion of unoccupied space — currently 23 per cent — to nearer its own (less than 11 per cent). Further, demand from tenants has continued to fall, while average rents are 6.7 per cent below their level at the end of last year. The flipside is that the value of industrial properties is now on the rise after two years of consecutive month-on-month falls.

Trading is likely to remain tough and will provide a stern test of Segro’s skills as an asset manager. But at 338¾p, or a 3 per cent discount to Cazenove’s 348p estimate of net asset value, and providing a dividend yield of 4.1 per cent, the shares are not stretched. Hold.

Catlin

For followers of Lloyd’s of London insurers, 2009 will be remembered as the year in which hurricanes hardly happened, at least not in the Gulf of Mexico, where the sector’s catastrophe loss exposure largely rests. But that has not stopped shares in Catlin Group falling more than 14 per cent since January. That is despite a third-quarter update that yesterday showed this £1 billion company performing to plan. Average premium rates rose 6 per cent, in line with the first half of 2009; insurance losses were predictably “benign”; and following a negative return in 2008, Catlin’s investment portfolio is faring better than expected. A skew towards hedge funds and non-government bonds has helped the value of its investments rise 5.2 per cent in the nine months to September 30.

So why the poor share price performance? The stock market is concerned that, even flush with the $289 million proceeds of March’s rights issue, Catlin is undercapitalised relative to its peers, which leaves it vulnerable to a dilutive share issue if a sizeable catastrophe loss ensues. That explains why Catlin also comes with an above-average 7.6 per cent dividend yield, reflecting fears that the payout may be cut. The corollary is that, should premiums hold firm and losses remain light, Catlin should provide the best returns of any of its peers. At 336¾p, or five times 2010 earnings, this is a buy for the brave.

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