George Salmon, Equity Analyst 8 August 2019
The answer is lots of things do. Interest rate policy, trade relations between the US and China, and economic indicators like GDP all have the potential to bring sweeping ups and downs.
But one of the biggest catalysts for share price movements is company results. These tell investors how much profit has been made, and shed some light on how much is likely to be earned next year, as well as how much will come back to shareholders as dividends or share buybacks.
The last couple of weeks, the peak of half year results season, has been one of the busiest periods of the year, and as usual, there’s been plenty of winners and losers. Here we take a closer look at some of the movers and shakers, and see what’s moved the price each time.
This article isn’t personal advice. If you’re not sure an investment is right for you, take advice. Investments rise and fall in value, so you could get back less than you invest.
Apple – better than expected
Price moves can be confusing. For example, Apple’s third quarter revenue rose just 1% while earnings per share fell 7%. The markets responded by sending the shares more than 4% higher in after-market trading. Why?
Well, it’s all about expectations and momentum. The last two quarters had brought revenue declines, and profits were expected to fall by more than they actually did. And perhaps most significantly of all, the group said it expected revenue to be $61-$64bn in the next quarter, as opposed to prior market forecasts of about $61bn. In many ways this shows what’s coming in the future is more important than what’s happened in the past.
And on that note, there was further encouragement Apple had recovered from problems in China that led to an unexpected profit warning in January. Sales trends remain negative due to momentum in the iPhone category, but are improving, and are positive in all other products.
One potential black mark against the group was the breakdown of revenue by product.
Apple only hit sales forecasts because of a strong performance from Mac, which came in ahead of forecasts. Some will say it’s not how, it’s how much. But we think the breakdown matters given the future profile of the business. The Services business, which Apple has trumpeted as the future of the group, was disappointing this time.
We imagine attention will be focused on the division when Apple next reports on 30 October.
Centrica – devil in the detail of the dividend cut
The headline in Centrica’s half year results was the dividend cut. And that’s why the shares fell 19%, right? Well, kind of, but there’s much more to it than that. It’s not right to say any company that cuts the dividend will see its shares fall.
For example, a company struggling to cope with the payout might be seen more favourably by investors once it’s shorn of the burden. And a company that cuts the payout by less than expected might see its shares rise, despite the cut.
Unfortunately, what happened in Centrica’s case was the precise opposite. Analysts had expected the payout to halve, but management actually went further and cut it from 12p to 5p per share.
It isn’t just the lost income that caused problems. Investors were less than enthused because the greater than expected dividend cut was a function of the underlying health of the business.
Centrica has spent the last few years looking to reposition itself away from the volatile world of finding and producing oil & gas, which places the onus squarely on the retail business. And progress here wasn’t particularly strong. Another 178,000 retail customers left in the half, while underlying profits from Centrica Consumer profits slipped 44% to £240m.
The group will have a new chief executive next year, and investors will want to see improvements from here on. The first task will be hitting guidance for adjusted operating cash flows of £1.8-£2bn, and net debt of £3bn-£3.5bn. If that can happen, and Centrica can finally stem the flow of retail customer outflows, there could be recovery potential. But for now, that remains a couple of big ifs.
Sports Direct – when M&A goes wrong
Every now and again investors feel the force of an unexpected barrage of bad news, and Sports Direct shareholders were on the end of one on 26 July. At one point the shares were down over 25%, but erased some of those losses to finish the day down by 6.5%.
They had to wait some time for that however, after the group delayed releasing results by a fortnight because of complications around recent acquisitions.
So it wouldn’t have been a surprise to hear that losses at the likes of House of Fraser dragged EBITDA (earnings before interest, tax, depreciation and amortisation) down 6%. But the group unveiling a huge €674m potential tax bill from the European business was more of a surprise. As a result, just months after striking an upbeat tone about the prospects of House of Fraser elevating Sports Direct to be the “Harrods of the High Street”, the group said the problems were ‘nothing short of terminal’.
Looking ahead, it’ll be interesting to see if this spells the end of a strategy that has seen the group invest in a series of retailers, including Debenhams and Iconix, owner of the Umbro and Pony brands.
The core business wasn’t exactly firing on all cylinders either. The group has had some success updating its stores, but relationships with key suppliers, think Nike and Adidas, remains challenging. Like-for-like sales in the UK retail business dipped 1.6%. For context, competitor JD Sports is still delivering growth in stores.
Despite the tough year, Sports Direct managed to reduce its net debt position to £379m. Underlying cash profits were £288m, so we don’t think the group is overburdened with debt. That stability should at least buy the group some time, and the potential for it to return to the golden years of 2012-15 could entice some.
So, like Centrica, there is the potential for a recovery. But also like Centrica, we think investors should focus on the ‘what’, and not the ‘what if’. More signs of progress are needed in our opinion.
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