Results time for listed companies is a case of managing investor expectations, and management can often issue overly cautious forecasts. It’s a sensible practice to under-promise and over-deliver, as share prices typically rise and fall not on how much money a company has made, but whether it’s better or worse than expected.
Get it right and the share price will look after itself. Get it wrong and you’ll be punished, as many have found out this year – think Provident Financial (PFG), Dixons Carphone (DC.), WPP (WPP).
We’re now in the fourth quarter, and financial year-end for many companies is rapidly approaching, so analysts at Liberum have taken their annual look at which firms might disappoint at results time, and which could trigger upgrades.
The broker screened the FTSE 350 and STOXX 600 to find companies with predicted second-half earnings per share (EPS) weightings that are three percentage points greater than their five-year median. These have “mountains to climb” and are “possible [profit] warners”.
It also looked for those with forecast H2 weightings three percentage points less than their five-year median. These have “molehills to climb” and have greater scope for profit upgrades.
Only companies with December year-ends are included in the screen and banking, resource, insurance and real estate stocks are excluded. There may be legitimate reasons for an abnormal H2 weighting in some cases, but last year’s list of possible warners stuck lucky, identifying both Rolls-Royce (RR.) and Pearson (PSON), both of whom went on to disappoint at their annual results.
Aerospace equipment engineer Meggitt's (MGGT) implied H2 weighting of 59% compares to a five-year average of 54%. Further, risks to the civil aerospace division are rising and business jets, general aviation and rotorcraft continue to be weak.
“A FY17 EV/EBIT of 13 times and free cash flow yield of 3.6% are unappealing,” argues analyst Ben Bourne.
Another engineer causing aerospace concerns is Senior (SNR). Its weighting to H2 is 56% compared to 48% previously. Full-year expectations are predicated on late 2017 being an inflection point for many of its industries. That may not be the case, though.
Valve manufacturer Rotork's (ROR) H2 2017 weighting is an implied 61% compared to a five-year average 54%, and Bourne says attention currently remains focused on the shock departure of the CEO a fortnight before interims.
“The strategy to reduce costs to fund an acceleration in investment appears tricky given the model is already lean.”
Others with mountains to climb include software firm Playtech (PTEC), consumer goods behemoth Reckitt Benckiser (RB.), Belgian brewer AB InBev (ABI) and French media conglomerate Vivendi (VIV).
Housebuilder Persimmon (PSN), like the rest of its sector, has had a strong first half with margins rising. Expectations for the second half are for stabilisation rather than continued progress, says Charlie Campbell, but this may prove to be overly cautious. Still, peers like Bellway (BWY) and Redrow (RDW) are preferred.
An unexpectedly strong first-half performer, online estate agent Rightmove (RMV) has a lower H2 weighting than in previous years, indicating full-year estimates are too low, according to analyst Ciarán Donnelly. H1 results are a good indicator to full-year results, so “Rightmove should deliver a beat”.
Nervousness around the UK consumer, with inflation on the rise, has driven cautious estimates for many consumer-facing sellers. However, Campbell reckons this could prove unfounded in the case of builders’ merchant Travis Perkins (TPK).
“We believe that [TPK’s] strategy to exploit scale more ambitiously will lead to better returns, prospects and valuation.” Watch for a third-quarter update in a fortnight for clues.
Others with molehills to climb include airline IAG (IAG), recruiter PageGroup (PAGE), manufacturer Morgan Advanced Materials (MGAM), housebuilder Taylor Wimpey (TW.), advertising giant WPP, roofing supplier SIG (SHI) and ASML (ASML).
Crisis-strewn Pearson and Provident are also on the list, with the former historically having a stronger H2, while recent profit warnings and subsequent profit downgrades have set the bar low for the next six months. However, Liberum analysts still rate both a ‘sell’.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.