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25 July 2016

UK Blue Chips: Which Will Perform Best?

The UK’s Blue Chips Are Set to Report Q2 Earnings

US earnings season is in full swing and some of its biggest and best known companies have surpassed the expectations of both markets and analysts. It’s now time to start looking ahead to what we might expect from the UK’s own blue chip stocks. With the Brexit vote adding spice to things on our side of the pond, any potential surprises are sure to move markets considerably.

Expectations were low in the US, most notably in the banking sector which led to some solid beats and a realization that shares had been seriously undervalued beforehand. It’s a similar story for UK peers – the bar has been set low. Are UK blue chips similarly undervalued ahead of their earnings updates? With companies desperate to retain investor confidence in challenging times, the trading opportunities around UK results will be numerous.

In this exclusive report we’ll explain the strategies many of our clients use to trade UK stocks during earnings season, but we’ll also tell you the importance of past performance vs. future outlook and what both can mean for a company’s share price. Finally, we highlight four of the most important UK blue chip stocks: BP (BP.), ITV (ITV), Lloyds Banking Group (LLOY) and Taylor Wimpey (TW.). Are these companies setting themselves up to solidly beat market forecasts?

How do companies report their earnings?

The first thing to understand is that companies want to present their results in the most positive way possible. This involves all manner of potentially confusing terms. You likely know the difference between revenue and profit, but what about the difference between pre-tax profit and EBITDA? If you don’t, then don’t worry because our analysts do! We’ll break down the results for you, tell you exactly what’s going on and what that could mean for the share price.

The second thing to understand is that, when it comes to company results, the devil is all too often in the detail. What we mean by this is that the focus is not necessarily on how the company has performed to date. In fact, future outlook is almost always what traders and institutional investors jump on (or off!) – They are the people whose actions move share prices and they buy future growth, not past growth. This is a simple observation that means next time you see a company’s share price down 10% when it reported a 10% jump in profits, you’ll have a good idea why.

A sly little dividend?

Another little trick to please shareholders in light of poor earnings figures is for a company to increase its dividend, or announce a special dividend as did Lloyds Banking Group at its FY2015 results in February. This type of action involves the return of cash to loyal investors and will often see those who don’t already hold the shares snap them up pretty quickly – with the subsequent uptick in share price momentum quickly glossing over a sore set of numbers.

How Accendo will help you see through the mist

Our analysts pick apart company results when they come out, but we keep our eyes peeled in the run-up too. There was talk of Lloyds’ special dividend ahead of its FY2015 results announcement, but that didn’t make the news until after the results came out. The share price had already jumped by 16%. We’re here to make sure you’re abreast of all developments in the run-up to results day so that you know things before the journalists do. We have access to all previews and broker comments concerning virtually every European and US stock that’s traded on the major global exchanges.

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Overstating the risks

While some recent macro data from the UK has indicated a negative impact from Brexit, Purchasing Managers’ Indices (PMI) are sentiment indicators whose readings are determined using surveys. Of course there’s uncertainty following the Brexit vote, and businesses are right to be less optimistic as a result. This lack of optimism is the same thing that led to expectations being so low – and so easily beaten – in the US in its latest round of earnings updates, and contrasts sharply with how the markets have actually performed since 23 June. In the US, equity indices have made numerous forays to fresh record highs while the FTSE100 has itself been in full recovery mode.

How to trade around results

Many investors, knowing full well the lengths to which a company will go to ensure its earnings report is taken positively by the markets, will buy ahead of results day looking to capitalise on the attractive share price move that potentially awaits. Others will wait until the information is made public, looking to react accordingly on the day should results impress or disappoint. In the latter case, a CFD can be used to go short (that is, sell) the shares in the expectation the price will fall. Remember (especially when buying or selling on the day) that the devil resides in the details! That’s what we’re here to help you with.

Will earnings season engineer a rebound by Brexit Laggards?

brexit laggards                  Source: Alpha Terminal, 22 Jul

The above table details about 1/5 of the FTSE100. These stocks and more are still trading up to 32% lower since the close on 23 June. Conspicuous in their presence are the banks/financials, travel stocks and house builders. Will the UK’s banks beat expectations just like their US counterparts have? Will markets see sense and realise that the UK still needs 300,000 new homes built every year?

Food for thought: Where sharp sell-offs turn out to be overdone, all it might take is a rose-tinted outlook or earnings beat that says ‘things aren’t as bad as we thought they would be’ in order to kick off some impressive recoveries. You can contact our trading floor to get the full list and myriad other metrics.

Now we’ll take a closer look at our top four Results Season picks: Taylor Wimpey, BP, Lloyds Banking Group and ITV.

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Taylor Wimpey (TW.)

Taylor Wimpey PLC (-)

Will shares fall back towards 100p lows or rally towards 210p highs?

Taylor Wimpey (TW.) is one of the leading UK house builders and, like its peers, has seen its share price hit hard by the Brexit vote amid concerns UK house prices could now fall by 20%. Its results announcement will be scoured for any inkling as to the company’s outlook in light of this. Note that demand is still outstripping supply in the UK housing market, and that government sources say the UK needs to build 300,000 new homes every year in order to redress the balance.

Reporting: Half-year results on 31 July
Broker Consensus:  59% Buy, 35% Hold, 6% Sell

Bullish: JP Morgan, Overweight, Target 250p, +70% (17 May)

Average 12-month target price: 177p, +21% (22 Jul)

Bearish: Credit Suisse, Neutral, Target 118p, -20% (30 Jun)

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Lloyds Banking Group (LLOY)

Lloyds Banking Group PLC (-)

Will shares fall back towards 47p lows or rally towards 88p highs?

Lloyds Banking Group (LLOY) is a hugely popular stock with our clients. The bank has the biggest mortgage book of any UK lender and so is intimately connected to the property market. Tanking house prices could be a disaster, which is likely partly priced in to shares right now. But as for Taylor Wimpey above, will house prices really fall that far given that supply must increase by so much to bring prices down? Investors will also be looking for comforting forward guidance and any update on dividends and other enticing titbits for shareholders – Lloyds delighted markets with a special dividend in February. Will it come bearing gifts again this time?

Reporting: Half-year results on 28 July

 

Broker Consensus:  48% Buy, 28% Hold, 24% Sell

Bullish: Mirabaud Securities, Buy, Target 102p, +85% (2 Feb)

Average 12-month target price: 62p, +13% (22 Jul)

Bearish: Bernstein, Underperform, Target 40p, -27% (6 Jul)

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BP (BP.)

BP PLC (-)

Will shares fall back towards 320p lows or rally towards 490p highs?

BP (BP.) is one of the stocks to have enjoyed positive share price action since the Brexit vote. The company books revenues in US Dollars, which is beneficial because BP pays its bills in British Pounds. The current FX environment is therefore beneficial for BP. A tough H1 might be expected, but the oil major’s outlook will again be of interest to investors and traders alike. Will divergent monetary policy in the US and UK make life even better? Remember we may get a UK rate cut in August while all signs point towards at least one US rate HIKE between now and the end of the year. Add to this what the company may say about how it views the current state of the oil market – is the sector set to regain its mojo?

Reporting: Half-year results on 26 July

Broker Consensus:  39% Buy, 52% Hold, 9% Sell

Bullish: Barclays, Overweight, Target 600p, +33% (15 Jul)

Average 12-month target price: 453p, +0.2% (22 Jul)

Bearish: Natixis, Neutral, Target 343p, -24% (27 Apr)

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ITV (ITV)

ITV PLC (-)

Will shares fall back towards 141p lows or rally towards 277p highs?

Following on from Lloyds, ITV (ITV) is another stock that has a history of returning cash to shareholders in the form of….special dividends! Quite simply, ITV is seen as undervalued. With shares down 30% year to date, and following an impressive post-Brexit performance, might the company use its results announcement to reward the faithful? Even if it doesn’t, its near 4% regular dividend yield and forward P/E ratio of 11.9 (anything less than 12 generally accepted as being a reasonable price, notwithstanding other factors) should attract interest from more risk-averse income seekers.

Reporting: Half-year results on 27 July
Broker Consensus:  54% Buy, 42% Hold, 4% Sell

Bullish: Liberum, Buy, Target 375p, +100% (18 Jul)

Average 12-month target price: 228p, +22% (22 Jul)

Bearish: Societe Generale, Sell, Target 155p, -17% (7 Jul)

 

NB: All pricing and consensus data from Bloomberg on 22 July; Full consensus breakdown available on request

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Other blue chip companies reporting THIS WEEK include:


Monday 25 Jul

Aberdeen Asset Management, Hammerson

Tuesday 26 Jul

BP, GKN, Provident Financial, Sage Group, Virgin Money

Wednesday 27 Jul

Antofagasta, ARM Holdings, Capita, GlaxoSmithKline, ITV, Shire, St James’s Place, Taylor Wimpey, Tullow Oil

Thursday 28 Jul

Anglo American, AstraZeneca, BAE Systems, British American Tobacco, BT Group, Centrica, Compass Group, Countryside Properties, Diageo, INTU Properties, KAZ Minerals, Lloyds Banking Group, Merlin Entertainments, RELX, Rolls Royce, Royal Dutch Shell, Schroders, Sky, Smith & Nephew, Thomas Cook, Weir Group

Friday 29 Jul

Barclays, International Consolidated Airlines, Pearson, Reckitt Benckiser

 


 

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Does your current broker’s morning report tell you all you need to know about yesterday’s news? If so, how is it offering you anything more than the plethora of information already available on the internet? What about what’s happened overnight?

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The journalists don’t pay for it and neither do you, so why not give it a go? You’ve nothing to lose and a lot to gain.

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Our research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. Accendo Markets research has not been prepared in accordance with legal requirements designed to promote its independence and may not comply with FCA guidelines to prevent conflicts of interest and is not subject to any prohibition on dealing ahead of the dissemination of research. As such, this research does not constitute a personal recommendation or offer to enter into a transaction, it is produced and distributed for information purposes only. Accendo Markets considers information contained within the research to be valid when published, and gives no warranty as to the investments referred to in this material. The income from the investments referred to may go down as well as up, and investors may realise losses on investments. The past performance of a particular investment is not necessarily a guide to its future performance. Prepared by Michael van Dulken, Head of Research

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