News Column

EasyJet slips on earnings worries as FTSE ends quarter on downbeat note

June 30, 2014

Nick Fletcher, theguardian.com



EasyJet shares have been on the slide for a few weeks on worries about whether the budget airline can keep its growth rates sky-high.

The latest pessimist to hop aboard is Bank of America/Merrill Lynch, which issued a sell note and speculated the company might have to issue a profit warning. Merrill moved from neutral to underperform and slashed its price target from £18 to £11.50. The downgrade helped push easyJet's shares 94p lower to £13.65. The 6% decline made the airline the worst performer in the FTSE 100. Merrill said:

We believe the consensus earnings per share upgrade story is over at easyJet, as negative yield momentum will cause confidence in the upgrade cycle to shatter. The share price has already shown signs of wilting under Europe's sweltering summer airline overcapacity problem. But this recent price move is misleading in the context of history.

The company has already admitted to a lack of underlying earnings' growth with its near-term guidance. We... forecast [2014] pretax profit of£555m (versus consensus of £567m) and earnings per share of £1.10 (versus consensus of £1.13).

Thereafter, with limited underlying earnings' growth likely in the second half, the overcapacity issue worsening and allocated seating benefit now mature,consensus will slowly start to get serious about its 2015 forecasts; seemingly at the moment growing pretax profit by an egregious £80m year on year (versus BAML forecast of negative -£170m year on year).....The last remaining bulls will likely be shaken out of the shares in November when the company likely profit warns on 2015.

The share price fall knocked more than £130m off the value of the stake held by founder Sir Stelios Haji-Ioannou. But there was better news for the entrepreneur from the Aim market. In its first day of dealings on the junior market his budget hotel group easyHotel ended at 87.5p, up from its 80p a share flotation price.

Back with airlines, and it was not just easyJet under pressure. Rising fuel costs and recent profit warnings from the likes of Lufthansa have dented confidence in the sector, and British Airways owner International Airlines Group reflected that with a 13.3p fall to 370.5p.

Overall the FTSE 100 drifted 13.83 points lower to 6743.94. But it has risen nearly 100 points on the month and 145 points on the quarter, supported by the continuing - albeit slowing - stimulus measures from the world's major central banks.

But investors were keeping their powder dry ahead of PMI data for June due later in the week, as well as Thursday's combination of the outcome of the latest European Central Bank meeting and US non-farm payroll figures. The American jobs data is a day early thank's to Friday's July 4 holiday.

And there are concerns the continuing strength of the pound - up to a six year high on the prospect of UK rate rises - would hit profits at exporters, at the same time as dearer borrowing costs dent consumer spending. Alastair McCaig at IG said:

A stronger pound does take its toll on UK firms bringing profits back home, and for now the FTSE's international element, so handy in times of obvious economic growth, is holding it back.

Among the fallers Sports Direct International, ahead of its latest attempt to win shareholders over to its incentive scheme for employees including Mike Ashley, lost 17p to 706.5p. The company squashed trade talk it was considering an offer for footwear retailer Office, but talk of a possible acquisition of some kind in the near future refuses to go away.

Heading in the other direction was BSkyB, up 11p at 904p as it said its broker Morgan Stanley would start buying shares for cancellation between now and its full year results on 25 July, as part of its £500m buyback programme. Rupert Murdoch'sTwenty-First Century Fox will sell enough shares to keep its stake at the current level.

Meanwhile ITV added 2.1p to 178.2p as Peel Hunt issued a buy note. The broker said:

We like ITV in terms of its earnings per share upgrade potential, both in terms of operational gearing and utilising a strong balance sheet (ITV is net cash). In recent years, the company has also paid a special dividend on two occasions, and this illustrates the approach to shareholder value. ITV continues to deliver very large mass market UK audiences, and we believe this justifies a strategic premium (trophy asset).

There was also a spate of bid speculation. Diageo added 18.5p to £18.66 following recent talk that SABMiller, up 22p at £33.88, might be looking for a deal with Diageo to fend off any approach from AB InBev.

Shire was steady at £45.70 awaiting the next move from potential bidder AbbVie.

Finally biotech minnow Tiziana Life Sciences jumped 17% to 49.125p after it signed a licence agreement with TTFactor, acting on behalf of the Italian Foundation for Cancer Research, the Institute for Molecular Oncology and the European Institute of Oncology. The agreement covers the use of twenty stem cell markers for patient stratification in breast cancer.


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Source: Guardian Web


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