A timely exit

Auto parts and building products manufacturer, Tomkins (TOMK) is finding current trading conditions a challenge. Given over 60 percent of sales take place in America this is hardly surprising. And the uncertainty pervading weaker markets across the Atlantic makes us increasingly uncomfortable about the company's future earnings outlook.

First quarter results released last week provide more insight to the difficult times Tomkins is confronting. Turnover for the period declined 11 percent to £739.0 million while adjusted profit fell by nearly a quarter to £58.3 million. Previously, we were of the view that Tomkins would be able to mitigate the serious pockets of weakness in some markets with cost saving initiatives and faster growth in regions such as Asia.

Clearly this is not yet the case today.

Tomkins two principle business units - Industrial & Automotive and Building Products - are both finding it hard going in America.

The automotive original equipment market is the culprit in Industrial & Automotive. Weakness here is more than offsetting better conditions in Europe and Asia as well as the aftermarket segment. As a result, sales, earnings and margins are moving in the wrong direction.

Within the Building Products unit, non-residential performance remains on track, however the residential market in America is weakening faster and more severely than first anticipated. We believe, the US housing sector will continue to deteriorate perhaps to the point of instigating a recession.

It is this last point that is the final nail in coffin for Tomkins. In order to avoid a recession, we believe America's Federal Reserve will resort to interest rate cuts in order to support growth (and declining house prices). The fallout from such a move would be to put the US dollar under even more strain.

We are mindful of the effect that a weaker dollar has on sterling denominated earnings and are actively reducing (not eliminating) our exposure where we see an opportunity (i.e. Catlin in FAT177 and Krispy Kreme Doughnuts in FAT182). Tomkins claims turnover and earnings were reduced 9.3 and 10.3 percent respectively due to the translation impact of a weaker greenback.

With further declines in the dollar likely in our view, this does not bode well for Tomkins going forward.

In all we do not believe the markets in which Tomkins is most heavily exposed to are going to recover markedly in the medium term. In the meantime, we foresee dollar weakness exasperating the tumultuous times. As such, we are recommending Members sell their holdings in Tomkins.

The current environment of rampant private equity liquidity rushing into stock markets around the world has provided an ideal opportunity for this exit. Unusually vague speculation that Tomkins is the target of unspecified industry players has had a notable impact on the share price.

As viewed on the daily chart, recent bid rumours have led to a significant spike in the shares, which are currently trading at the highest level since August. With this scenario already factored into the price, we believe the recent gains could quickly dissipate if a bid for the company did not come to fruition.

Tomkins has under performed compared to other holdings in our portfolio since inclusion in February 2005. In our view, the recent surge in prices provides an opportunistic time to exit our position with a profit.

Accordingly, we recommend Members sell their holdings in Tomkins around 283p.