The Week Ahead 4 - 20th to 24th May 2013

Markets continue to go up, dips keep on being bought.

A selection of companies reporting this week.

Tuesday, 21st May

Interim - Greencore Group updates the market and has been recovering well after falling heavily back in February due to the horsemeat scandal. That blip in the share price when it fell to around 80p has been more than made up as it now stands at around 118p.

Finals -  Telecom Plus and Vodafone.

We could see two contrasting reports from these two telecoms companies. Telecom Plus just seems to keep on going up and up on the back of good results, it has been a good few years since it has had any blip in performance. As a FTSE250 growth company it will be a surprise if they come up with anything unexpected.

On the other hand Vodafone might be about to make an announcement about the size of likely future dividends if press speculation is anything to go by. There is also the little matter of their Verizon Wireless holding which continues to help keep the price up in recent months on speculation of a buy out, but remains an ace card for the company if ever a deal is done.

Business elsewhere is not so hot.

Meanwhile, Vodafone is expected to reveal annual results that show the impact of the continuing Eurozone crisis and European regulation on its core business. 

Vodafone will report a drop in sales in the wake of heightened competition, analysts predict. 

They have also projected that the company will show its growing reliance on Verizon Wireless for profits. Last week, Vodafone announced that will receive more than £2.0bn from its stake in the US join venture with Verizon. 

Verizon Wireless, which has been at the centre of takeover rumours by Verizon for months, is paying a total of $7.0bn to shareholders at the end of June. 

Vodafone, which owns 45% in VZW, will receive $3.2bn, while Verizon will pocket the rest. 

http://www.digitallook.com/news/20907957/Tuesday_preview_M_S_and_Vodafone_report.html?username=&ac=

Final - Marks and Spencer. Not expected to be that good which given the recent run up in the share price since mid March makes you wonder what is going on. The easy answer is that we are in a bull market which takes everything up with it, but the results this week could see a sell off if profits are down as many expect. Better to have ridden the wave up with this one perhaps.

Analysts forecast M&S will report its lowest annual profit in four years, as the retailer’s struggling general merchandise division continues to offset a rise in food sales. 

The firm’s clothing business has posted seven consecutive quarters of underlying sales declines, prompting an overhaul of the division to draw in more customers. 

M&S is anticipated to post a pre-tax profit of £640 to £670m with a consensus of £658m, according to a company poll reported by Reuters. The group made a £706m profit the year earlier. 

http://www.digitallook.com/news/20907957/Tuesday_preview_M_S_and_Vodafone_report.html?username=&ac=

Thursday, 23rd May

Final - Qinetiq. Will be interesting to see what if anything they report on cutbacks or delayed contracts with the US as budget spending goes on hold. Share price has dipped and struggled recently on fears that spending on defense will be cut going forward.

Direct Line, are the Sid's back?

Back in the 1980's when privatization was all the rage for the Conservative Government, Sid was chosen as the campaign name of the imaginary ordinary bloke in the street who just might be interested in buying into the nationalised industries that were being sold off.  Millions joined in, often selling for a quick profit as they were priced to sell, BT, UK water, and British Gas to name but three (UK Water ad below).

Such IPO's, especially ones where the public are invited to buy are now rare.  Direct Line Insurance is the latest big IPO, which while not owned by the Government, is owned by RBS the bank saved by the taxpayer from going under back in 2008. In effect, the Government does still own 83% of  RBS and it wouldn't be around today if it wasn't for the taxpayer.

Public Sector Portfolio Watch - Update - QinetiQ

If you want a good example of a momentum share right now then take a look at QinetiQ.

QinetiQ was sold off by the last Labour Government in 2006 and for some time it looked like those who bought into the IPO had been sold a turkey.  It came to the market at 200p a share and after an initial rise in price it has spent most of the last 6 years underwater.  It is still underwater, but at 196p it is now standing in the shallow end of the pool and long term investors who bought in at the IPO might just be about to see a paper profit.

Of course, in the seven years since it came to market there have been ups and downs, but mostly down for those that bought at the wrong time, like at the IPO.  However, since it dipped under a pound back in August 2011, it has been on a steady almost relentless upward rise, just about doubling in price. This has also happened against the backdrop of uncertainty in defense contract procurement going forward. According to the latest QinetiQ trading update, nothing much has changed regarding this uncertainty.

Trading Environment and outlook

The degree of political and economic uncertainty in both our major markets means that forward visibility for the next six months is much lower than usual, particularly in the US. However, the strong performance in the first half gives the Board confidence that the Group should at least meet its expectations for the current year, absent any material change in customer requirements. The Board's view of the outlook beyond the current year remains unchanged.

http://www.digitallook.com/news/rns/20380573-38318/QQ_-Trading_Statement_html

So why so bullish?

The "Public Sector" Portfolio

This is just an idea I want to run with.  A portfolio of FTSE350 companies that to some extent depend on Government contracts for their business.  It will be interesting to monitor performance over time to see what effect austerity and Government cuts have on the bottom line for these companies.

I've chosen 4 to follow;

Capita 

Capita is one of the UK's leading outsourcing specialists. Established in 1984, the company now counts both private and public sector businesses among its customers and is perhaps best known for its involvement in London’s congestion charging scheme.

Serco Group 

Global service company Serco manages research laboratories, local education authorities, leisure centres and prisons. Its business also includes the operation of London’s Docklands Light Railway and air traffic control towers in the Middle East and across America.

Carillion 

Provides expertise in commercial and industrial building, refurbishment, civil engineering, road and rail construction and maintenance, mechanical and electrical services, facilities management and PFI Solutions.

Qinetiq

QinetiQ is one of the world's leading defence technology and security companies, manufacturing and supplying products such as sensors for weapons, advanced robotic systems, port security products and advanced security for computer systems.

More to follow.


*Company description from DigitalLook. 

Cash is increasingly king for UK FTSE listed companies

Research released today from Company Watch found that UK non-financial listed companies are saving more cash and are reluctant to spend or go into debt as the gloom and economic uncertainty almost everywhere continues.  They have a cash hoard of around £19 billion which in the face of what the banks took from the UK taxpayer may not seem much, but it is still a fair reflection of the lack of confidence that business has to spend and expand.  In Europe the figure is £110 billion.

Nick Hood, head of external affairs at Company Watch, said firms were choosing cash for security. 

He said: “All European economies are affected to some degree by the eurozone crisis and it looks as if the headlong growth of the Bric economies is faltering, so it’s hardly surprising that the bosses of our largest businesses view debt as dangerous and cash as comforting. 

“This scenario will concern politicians across Europe, but in particular in the UK, where only investment can generate the growth needed to re-balance economies and reduce deficits.” 

Given that many of the most debt laden companies on the FTSE had the rug pulled from under them as the banks ran for cover in 2008 (and are still running), it's hardly surprising that those businesses that may be fortunate to be flushed with cash have decided to keep it as their rainy day fund.  Business is also complaining that banks are now reluctant to lend to them anyway, although the banks deny this.  What is almost certainly true is that while the banks may be willing to lend it is going to be at a price, and the interest rate that business will be repaying, like that for the more general consumer, isn't going to be anywhere near the historically low BoE base rate which is almost an irrelevance for Mr and Mrs average unless you got a tracker mortgage prior to 2007 that is.

Then there is the news from the US that the uncertainty of the "fiscal cliff" and pending Presidential election could slow down further investment from business and see the US economy go back into (official) recession.

On Jan. 1, 2013, Bush-era tax cuts are set to expire, $1.2 trillion in automatic spending cuts begin - the price of Congress' failure to seal a long-term fiscal plan last year - and the U.S. debt ceiling will need to be raised again. Those and other scheduled measures will probably need to be dealt with in the lame duck session of Congress, after the election.

 Whatever the political outcome, some believe employers will show increased nervousness as the year advances. 

"Our view is that they will slow the pace of hiring and investment in the second half of this year, causing growth to slow down," Bank of America economists wrote in a June research note. They expect U.S. gross domestic product growth to slow to 1 percent by the fourth quarter due to a "major spike in uncertainty."

One area of US spending that may get cut, but will still be almost as much as the rest of the world put together, is defense.  UK listed companies Qinetiq and BAE Systems have managed to avoid the fallout so far, but both seem to expect the likelihood of difficult days ahead.

 “Defence markets remain challenging as the long cycle of high defence spending comes to an end and governments seek to reset budgets to deliver deficit reduction goals,” said QinetiQ. 

“In the US, visibility is limited with delays continuing in the award of both Department of Defence and federal civil business. This uncertainty is expected to continue at least until the outcome of the US presidential elections in November.”  

The warning here for investors is to be weary of any listed company that relies heavily on Government contracts, especially as the true extent of austerity cuts has not hit yet.

Sources;

Cash is king_The Scotsman

Fiscal Cliff

Qinetiq - Defence markets remain challenging