Blue Index - UK Market and Share Analysis

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Diageo – a solid looking portfolio stock

There are some stocks which trundle on with gently rising earnings over the years, many of which are the types that Warren Buffett looks to buy at a good price. One of these is Diageo, where Berkshire Hathaway has had a stake since 2005, and once again results today were steady despite rising costs and lower consumer spending. Although eps for the year to June rose just 7% to 59.3p, CE Paul Walsh reaffirmed that the group could deliver organic operating profit within its range of 7% to 9%.

Whilst this is by no means the fastest growing stock in the Footsie, the combination of positive exchange rate movements, especially if sterling continues to weaken, and its share buyback programme suggests double-digit eps growth. The forecast p/e looks to be about 14, which is good value for a long term steady growth story. The shares have just begun to outperform the market after a dull period, and only acceptance below 925p would threaten the gentle bull market here

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BUY STAGECOACH

Technicals
You cannot ignore stocks that have moved into new high ground, and for the first time in over a decade this is the case at Stagecoach. What we are also seeing is a new higher low above the rising 200 day moving average together with excellent supporting volume. The last five days have seen white candles, and it looks as though we might see some real impulsive action from here. The extrapolated initial target is 360p, and stops should be placed at 293p, which should not be hit if the trend is valid.

Latest Significant Fundamentals
On 28th August, Stagecoach said trading over the last four months had been above expectations, principally due to a better than expected performance by the UK bus division. This saw 9.3% like-for-like revenue growth in the sixteen weeks to 17th August, while the UK rail division also saw 9% LFL growth over the same period. Revenue growth at Virgin Rail Group was 2% on a LFL basis. LFL revenue growth in North America, including the contribution from Megabus.com, was 7.6% in the three months to the end of July. The group said people continued to abandon other forms of transport in order to travel by bus. LFL passenger volumes in the UK bus division rose 4.9% on a year ago, with LFL full-fare volume growth of 2.3%. The growth in the UK Rail division incorporated the negative effect of the transfer of the Reading-Brighton route to another operator, which reduced growth by around a single percentage point. The UK Rail figures excluded figures from East Midland Trains, which saw a 16% lift in revenues on a year-on-year basis in the sixteen weeks to 17th August. The group said profit at Virgin Rail Group was at the higher end of the expected range

 

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SELL VENTURE PETROLEUM

Technicals

We have featured Venture Petroleum on the long side this year, as it experienced a remarkable and almost unbroken run up between March and May, but we now have a new pattern in place. The shares have seen a change in their relative performance against the wider market and we now have a lower high in place. It looks as though the next trend of note will be to the downside, and we recommend short positions with an initial target of 687p, the last low of note in August. Stops should be placed at 770p, which should not be hit if the trend is valid.

Latest Significant Fundamentals

On 1st July, Venture Production resumed its growth path in the first half of 2008 with production close to record levels. Average group net daily production for the first six months of 2008 was about 47,700 barrels of oil equivalent per day, up 8% on the levels in the first half of last year. It said that the improvement was largely the result of two new production wells coming on stream since September 2007. Elsewhere, gas production was ahead of expectations, while oil production from the company’s established fields was also strong. Soaring energy prices contributed to a surge in sales revenues, particularly in the gas market where conditions noticeably improved in 2008. The company said it would not benefit fully from the impact of higher commodity prices because of existing oil and gas hedges and long-standing gas sales agreements. It was actively working on seven new projects and these were expected to come on-stream in the next two years and substantially boost production levels.

 

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SELL VODAFONE

Technicals

Vodafone made a clear lower high below the falling 200 day moving average back in July, and since then we’ve been watching and waiting for suitable selling opportunities. After a big gap down and then a gentle recovery the trend has now decisively turned down and Friday saw a big black candle on decent volume. We now look for a move to retest of the 125.5p level, but a move towards intermediate support around 114p is possible. Stops should be placed at 145p, which should not be hit if the trend is valid

Latest significant fundamentals

On 22nd July, Vodafone said full year revenue was now expected to be around the bottom of its £39.8bn to £40.7bn outlook range, reflecting recent economic weakness and lower than expected equipment revenue. It did though expect it would achieve adjusted operating profit in the range £11bn to £11.5bn, capitalised fixed asset additions of £5.3bn to £5.8bn and free cash flow of £5.1bn to £5.6bn. For Q1, group revenue rose 19.1% to £9.8bn but up only 1.7% organically. Europe service revenue rose 15.7%, driven by strong foreign exchange, but at an organic level, it was down 0.2% with Spain suffering the most. Eastern Europe, MiddleAfrica, Asia Pacific service rose 30.9%, up 8.7% organically, and there was strong total revenue growth from India of over 50%

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BUY GO AHEAD GROUP

Technicals

There has been a change in sentiment towards transport stocks in recent months, and in the case of Go Ahead Group we have also seen a succession of buying volume spikes. The shares have stair stepped up and now look ready to break out on another leg north. This morning has seen a decent white candle and we can target a move towards the 2200p area, where there a small congestion zone from the turn of the year. Stops should be placed at 1860p, which should not be hit if the trend is valid.

Latest Significant Fundamentals

On 5th September, Go Ahead reported results which were significantly ahead of last year and above its expectations in June. It said it was well placed for the year ahead, whilst mindful of the current economic uncertainty. Profit before tax for the year rose 19.1% to £131.1m on revenue that increased 20.4% to £2,199.1m. The group said all three of its divisions increased operating profit, benefiting from strong demand for services. Passenger growth in both bus and rail accelerated in the second half of the year. Bus operating profit margin improved by one percentage point and it hedged all of next financial year's fuel requirements, which accounted for around 10% of its bus costs.

 

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BUY BAE SYSTEMS

Technicals

While BAE Systems shares have displayed plenty of intra-day volatility, the overall trends have been fairly quiet in recent months. It is however noticeable that they are beginning to outperform the wider market and yesterday saw a big white candle on very high volume. This looks worth following and we can see a rally developing from here with an initial target area around of 510p, where there are various bands of resistance. Stops should be placed at 429p, which should not be hit if the trend is valid.

Latest Significant Fundamentals

On 1st August, BAe Systems said H1 EBITA rose 26% while the outlook for 2008 was expected to benefit from further high demand for armoured wheeled vehicles. Earnings before interest, tax and amortisation rose to £881m for the six months to 30th June 2008 from £700m the year before, and sales rose 12% to £7.75bn. it said that building on the H1 performance, the previously anticipated growth outlook for 2008 as a whole was expected to benefit further from the current high demand for armoured wheeled vehicles to meet operational requirements. The group, which supplies army vehicles for US and UK troops in Iraq and Afghanistan, said its order book increased to £41.1bn from £31.7bn previously.

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BUY CRODA

Technicals

Croda is a stock we have not featured for some years, but there is an interesting short term set up here. The big picture shows a share outperforming the wider market and oscillating around the flat 200 day moving average. Recently we have seen two pullbacks to support just below 600p, but this morning there is a decent gap up with good buying volume. We now look for a move towards 705p, where there are two spike highs of note, and stops should be placed at 585p, which should not be hit if the trend is valid.

Latest Significant Fundamentals

On 29th July, Croda saw profits rise 90% and raised the interim dividend by 25% for the half year as it experienced good sales in both of its divisions. Pre-tax profit jumped to £52.9m from £27.8m previously on turnover that increased 21.3% to £488.7m. Favourable currencies contributed 8.2% to the result, while the results were also influenced by increased glycerine prices, which contributed an additional £4.9m to profits. It said glycerine prices had fallen since June and there would be negligible benefit in H2 of this year and H1 of 2009. On a divisional basis, both Consumer Care and Industrial Specialities saw increases in sales, profits and margins as it continued to see robust demand for its products around the world. Significant input cost inflation in both raw materials and utilities was fully passed on in the marketplace via average selling prices increasing 17.3%.

 

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BUY ANGLO AMERICAN

Technicals

Although it might be one of those days where timing is more important than usual, we really need to stand back and look at the big picture. After a savage decline in recent weeks, the miners have now seen some determined buying volume and Anglo American is in the forefront. Clearly, longer term players would want to wait for a higher low here, but there is a short term opportunity to pick up a decent profit if this rebound continues. The initial target is 2700p, where what was a small previous support level becomes resistance, and stops should be placed at 2200p, which should not be retested if the trend is valid.

Latest Significant Fundamentals

On 31st July, Anglo American reported record half year underlying earnings and said that it expects a strong H2. Strong metal prices helped it announce underlying earnings of $3.48bn compared to $3.06bn last time despite a 9.7% drop in revenue to $17.9bn. Operating profit rose 30% to $5.97bn, thanks to increased copper, iron ore, manganese ore, coal and phosphates production. It said that despite the macro outlook for H2 remaining uncertain due to the evident slowdown in many developed economies, this was offset by continued strong demand, particularly from the developing economies, led by China. It expected a strong H2 driven by increased production, further improvements in its operational performance and robust pricing.

 

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BUY DE LA RUE

Technicals

There were surprisingly a large number of buy signals in the market yesterday, and one that stood out was De La Rue, where the shares exploded out of a fairly tight trading range on huge buying volume. The overall picture has been gently bullish for some time, and this sets up a potential impulsive move of some note, with the chance of new all time highs. The initial target is 972p, where there is significant overhead resistance from earlier this year, and stops should be placed at 845p, which should not be hit if the trend is valid.

Latest Significant Fundamentals

On 16th September, De La Rue said that its performance for Q2 and H1 had been in line with the board's expectations. It said it entered the second half year with a strong order book and the board remained confident in the trading outlook from continuing activities for the current year. The group said the currency business had driven H1 volumes and performance, and expected this to result in good year-on-year volume and revenue growth, despite lower overspill volumes.
Operating cashflow remained strong, although as anticipated, advance payments had reduced in H1 and were expected to move towards more normal levels by the year end. As previously announced, it proposed to return approximately £460m of capital to shareholders, equivalent to 305p per share, through a B share scheme accompanied by a share consolidation.

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Sell Kingfisher

Technicals

Shares in Kingfisher have rallied strongly this morning from the floor of the post July range. The likelihood now is that three day resistance above the 200 day moving average at 130p will kick in. Given current stock market conditions we should expect there to be another dip below the 120p zone over the next few days.

Latest Significant Fundamentals

Kingfisher, Europe's biggest home improvements retailer beats first-half profit forecasts and says more cost cuts will help it to cope with very tough trading conditions, particularly in the UK.
Kaupthing analysts highlight better-than-expected profit margins in France and a halving of the company's cost growth guidance in the UK to 2 percent. However, Cazenove analysts say the medium-term potential rests in a recovery at Kingfisher's UK business and 'we are struggling to see why (rival) Home Retail would fail to provide equivalent earnings recovery, and from a much lower starting point valuation.

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BUY HSBC

Technicals

Shares in HSBC have rallied sharply this morning via a gap through the 200 day moving average at 819p. The current position is that we have intraday support at the top of the gap at 859p, the level of the 20 day moving average. The likelihood is that while above this on an end of day close stop loss basis the upside could be a retest of the intraday high of the day so far at 890p.

Latest Significant Fundamentals

HSBC has walked away from its offer to buy Lone Star’s 51% stake in Korea Exchange Bank, citing the current turmoil in the financial markets. “Discussions with Lone Star have not led to agreement on how the transaction might proceed on a basis acceptable to HSBC,” the group said.

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SELL WOLSELEY

Technicals

Shares in Wolseley have rallied sharply this morning to test what appears to be the old support area from June at 446p, and Friday’s 455.75p intraday high. Indeed, the expectation is for the 450p zone to come in as resistance, with only an end of day close above the current intraday high of 450p suggesting that there will not be a retest of the intraday low of September at 378.25p.

Latest Significant Fundamentals

Wolseley reported a 77.1% drop in full-year pre-tax profits and said it expects a number of markets in which it operates to deteriorate in the short term. Pre-tax profit dropped to £145m in the year ended 31 July compared with £634m last time. Revenue increased by 2% to £16,549m. However, the group said it remains confident that it will continue to be compliant with its banking covenants over the year ending 31 July 2009 and beyond. There are no plans to raise equity or renegotiate banking covenants, although these remain options should market conditions deteriorate very dramatically, Wolseley stated.

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BUY MITCHELL & BUTLERS

Technicals

Shares in Mitchells & Butlers have drifted back towards the floor of the recent 250p – 300p range which has been in place since the middle of last month. The view at this stage is that it is worth buying near the 250p support area, and relying on the September 2008 intraday low of 238.5p not being broken. The obvious initial target is a line of resistance from August at 290p.

Latest significant fundamentals

The latest MAB trading update impressed according to initial market reaction, with like-for-like sales +1.3% during the past 9 weeks versus +0.8% in the first 42 weeks. The performance stands out even more when one considers recent weather conditions, while the company's value and volume strategy helped as well. However, it is not expected that there will be widespread earnings upgrades given the specter of rising costs that the company is facing

 

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SELL MAN GROUP

Technicals

Shares in Man Group are hovering around the 400p mark, in the wake of the gap down in the shares yesterday from 433.5p. The most likely path in the near term is for there to be further losses towards the main May 2006 intraday low of 353p. Any strength towards the top of the gap can be regarded as a shorting opportunity.

Latest Significant Fundamentals

Man Group has asked the U.K. financial regulator to put its name of a list that bans short selling of stock. However, the hedge fund told the Financial Services Authority that it still strongly opposes the short-selling bans on specific companies – Financial Times

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BUY SMITHS GROUP

Technicals

Shares in Smiths Group have managed their sixth consecutive session, finding support at or just below the 200 day moving average
now at 1,015p. There is a good chance now, that if the shares stay above the 200 day line and intraday low of September at 999p, we
could see a return to the initial September resistance zone above 1,150p.

Latest significant fundamentals

The recent strengthening of the dollar against sterling should provide a useful boost to Smith Group’s earnings: with more than half of its sales drawn
from America, every two cents’ advance in the exchange rate adds £3 million to its profits. The scale of Smiths’ sales to the oil and gas, healthcare and
security sectors should also make it relatively defensive. What is less easy to protect is Smiths’ valuation premium to its engineering peers – of nearly
one third at yesterday’s £10.16, or a forward multiple of 13 times. That suggests that further near-term share price outperformance will be harder to
achieve. Hold. The Times

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BUY UNITED UTILITIES

Technicals

For the technical bunch, shares in United Utilities offer perhaps one of the most simple charting patterns around - a range. In the case of this stock the near term support is down to 660p this month, and as high as 735p for August. Given where the shares are now in the 680p’s we have a descent risk / reward trade to retest the resistance of last month.

Latest Significant Fundamentals

September 26th: United Utilities shares trade on an 8% premium to the company’s regulated asset base. There is the prospective dividend yield of 5.8%, which is well covered by the company’s highly visible earnings. Defensive, safe, boring. Buy says the Telegraph.

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BUY ICAP

Technicals

Shares in ICAP have gapped down to the main November 2007 support line in the 330p region. Technically it would be expected that there should be a rebound towards the top of the latest gap down at 371p even if the share price should fall away after that.

Latest Significant Fundamentals

Interdealer broker ICAP announced that following the six months ended September 30, the company expects group revenue to be some 20% ahead of the same period in the previous year.
It said that, “current conditions make forecasting market activity during the balance of the year much more difficult than usual. However, after investing significantly in the future growth of the business, profit before tax, amortisation and impairment of intangibles arising on consolidation and exceptional items for the financial year ending 31 March 2009 is anticipated to be ahead of the year to March 2008 when ICAP plc's profit was £330 million. If market developments and exchange rates are favourable, then the increase in profit could be well ahead of this figure."

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BUY TESCO

Technicals

Shares in Tesco have been in a mildly ascending price channel since the end of June and while above the floor of the channel at 364p are likely to hit the top of the channel at 410p as a minimum target, especially as they have withstood recent declines in the FTSE 100 so well. Only below the floor of the channel at 364p on an end of day close basis would upset the bull argument.

Latest Significant Fundamentals

Tesco, Britain's biggest retailer, met forecasts with a 10.3 percent rise in first-half profit and said on Tuesday like-for-like sales growth at its British operation accelerated over the summer months. 'Our business is strong, broadly based, increasingly international and, I believe, well-placed not just to cope with the challenges which lie ahead but also to grasp the growth opportunities open to us,' Chief Executive Terry Leahy said.

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SELL BSkyB

Technicals

Shares in BSkyB have been in a descending price channel since the end of August, with the top of the channel at 425p and the former August support at 434p. If the bear trend is to continue and the floor of last month’s channel at 390p hit, then one would expect the shares to fail between current levels and the mid 430p’s.

Latest Significant Fundamentals

BSkyB faces a major challenge to its business model after media watchdog Ofcom said yesterday it may force Sky to share its most precious content – top-flight sports and Hollywood films – with all rival operators. Under the proposals, Sky would wholesale Sky Sports 1 and 2, their high-definition versions, and 12 of its movie channels - Telegraph.

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BUY THOMSON REUTERS

Technicals

Shares in Thomson Reuters appear to have made a fourth successful test of the post July 1,200p – 1,300p support zone. At least while above the intraday low of September at 1,181p on an end of day close stop loss basis the upside could be towards the bottom of the September gap down at 1,441p. On the face of it major support looks to be in place.

Latest Significant Fundamentals

News and information publisher Thomson Reuters reaffirmed its full-year outlook in slides for a presentation to analysts at a London investor day on Thursday. The company said it expected revenue growth of 6 to 8 percent, almost all organic, and an underlying profit margin of 19 to 21 percent for 2008. It also reiterated targets to generate free cash flow of 11 to 12 percent of
sales and for capital expenditure of 8 to 9 percent of revenue.

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