Earnings season is in full swing in the US and Europe with $4.3 trillion in market capitalisation reporting this week. Half of it comes tomorrow.
Of particular note there is a very busy session on the FTSE 100. Combined, the companies reporting on Thursday make up more than 27% of the FTSE 100 by index weighting. Highlights include:
Anglo American (LON:AAL)
Chief executive Mark Cutifani said recently that the company is on course to meet production forecasts after an 8% rise in second quarter output. Earnings before nasties are expected to come in at $4bn with net debt at $7bn.
The stock is on a tear in the last 18 months, climbing 380% from its January 2016 nadir. In the last month the stock is 15% higher as copper and Iron ore prices climb and better Chinese data supports the wider mining sector.
All eyes are on the dividend: does Anglo think it can reinstate the divi by the end of the year, when it expects to be able to return up to 40% of earnings to shareholders?
A 53% jump in half-year earnings at Kumba (JO:KIOJ), its 70% owned iron business in South Africa, has investors thinking there could be a surprise to the upside. Kumba said it will reinstate the dividend and so Anglo’s stock has jumped this week on bets it could follow suit. Copper at a two-year highs and iron ore at $70 a tonne makes this a lot more likely.
British American Tobacco (LON:BATS)
The writing is on the wall for tobacco groups and falling cigarette sales is making British American Tobacco, the third largest stock listed on the FTSE, pivot towards vaping. Heat-not-burn products seem to be doing better in Japan than thought. But the vast bulk of earnings still come courtesy of tobacco products, sales of which are expected to continue to slow. The key for BAT is whether it’s beating the market decline of around 4%. A ban on cigarette packs of fewer than 20 and plain packaging is hitting sales but prices are rising.
BAT has been one of the main beneficiaries of the sterling exchange rate since Brexit, and a weaker pound will continue to help. The stock is more than 30% higher since just prior to the referendum last June. Consensus analyst estimates put EPS at 132p. Neil Woodford recently sold off his stake in BAT but held onto Imperial Brands (LON:IMB) stock.
Diageo (LON:DGE)
Something to lift the spirits? Gin sales are soaring in the UK – see Fever Tree (LON:FEVR) share price – but gin is just 3% of net sales. Johnnie Walker sales are also rising and whisky is a much bigger earner – a quarter of sales. Reporting full-year earnings, Diageo is looking to build on first-half organic sales growth of 4.4%, its best since 2013.
Foreign exchange tailwinds are expected to deliver continued support to earnings as the weaker pound flatters the bottom line. Analyst consensus is for 4.2% organic sales growth and for organic operating profit to climb by more than 5% with adjusted earnings per share of 105p. Diageo said in January it expected foreign exchange effects to lift operating profit by £460m. A 5% recovery in the pound this year against the dollar might see this fall a touch.
Ivan Menezes, Diageo chief executive, is confident the company has distilled the right ingredients for growth. But after paying $1bn for George Clooney’s tequila brand (and a past for taking impairments on acquisitions), investors may wonder if the price of the growth is right.
Lloyds Banking Group (LON:LLOY)
Continued progress on return on capital and profits expected, particularly with improvements in net interest income and a reduction in impairment charges year-over-year. Analyst consensus is for revenues to hit £4.4bn and underlying profits just shy of £2bn. The Q1 report (at which it raised its FY2017 guidance) showed Lloyds generating an underlying return on tangible equity of 15.1%. Statutory return on equity was 8.8%. Before divi's are paid its CET1 ratio was at 14.5%. There ought to be some impact on capital position because of completion of the MBNA purchase – around 80 basis points of capital.
Royal Dutch Shell (LON:RDSa)
Shell has ridden out the weakness in oil prices and is now enjoying an uptick in its fortunes. Three straight quarters of earnings in line or beating expectations has placed the stock on a firmer footing, with the shares now up more than 50% from the trough of January 2016.
Oil prices have recovered since then but Shell has also been good at cutting out the fat. Net debt has ballooned thanks to the BG acquisition but gearing is expected to fall as the group offloads assets. Shell recently announced the $1.23bn disposal of its stake in Corrib gas field to pare down debt – it has now disposed of around $23bn in assets since 2016, putting on course to meet $30bn target by the end of 2018.
Q1 earnings were well ahead of forecasts as Shell doubled profits but exuberance remains contained by efforts to shore up balance sheets after the oil price crashed. Earnings could be as much as three times higher than last year. Shell accounts for about a tenth of the FTSE 100 by index weighting.
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