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Earnings look ahead: Ocado, Kingfisher, Smiths Group

Online supermarket Ocado, DIY firm Kingfisher and medical device group Smiths report earnings next week.

Chris Beauchamp

Chris Beauchamp
Chief Market Analyst, London

Publication date : 2018-09-14T12:33:06+0100

Ocado
Source: Bloomberg

Ocado (Q3 statement 18 September)

Ocado continues to be a firm of two halves – the UK retail division may see more growth, but it will require further extensive investment, with the attendant costs, and even a big push into automation is unlikely to reduce this by a significant margin.

Instead, we see a further expansion of the solutions business, which retains the capability to drive long-term increases in revenue. Margins remain tight and net debt has continued to rise, so some of the optimism surrounding the shares may diminish.

The spike in the shares has driven the price-earnings (P/E) ratio to an astronomically high level of 2366 times forward earnings, from around 170 times at the end of last year. It also trades at 9.7 times forward book value.

Ocado shares have fallen back from their summer highs, and while they are below the 100-day simple moving average (SMA) at £9.50, momentum is now oversold. A defence of £9.15, as we saw in June, might suggest a move back towards the recent highs at £11.40.

Ocado chart

Ocado chart

Ocado chart

Kingfisher (first-half earnings 19 September)

Kingfisher is expected to report earnings of 24.2p per share, up 11.7% over the year, while revenue is forecast to rise 1% to £11.77 billion. The average move on results day is 5.2%, while current options pricing suggests a 4.55% move. Kingfisher has beaten earnings forecasts in six of the last eight reports, but only four of the last eight times on revenue.

The company faces challenges in both the UK and France, even as it remains stuck in the middle of a long-term turnaround plan. The longer-term decline in DIY activity in the UK is a well-established fact, while the Castorama chain in France remains weak despite increased spending that will weigh on margins. Some improvement in the UK division may be seen if the Homebase rival decides to expand its store closure programme.

Kingfisher currently trades at 9.6 times forward earnings, its lowest level in over five years, and well below the five-year average of 14. Due in the next 12 months is £400 million in net debt, just over 40% of current outstanding debt, while the current dividend yield is 4.1%, above the two-year average of 3.3%.

Having fallen below the lows of April, around 275p, the price has remained under pressure. It has also dropped below the 2014 low at 264p, with the next area of support at 250p. A rally back above 280p is needed to restore a measure of bullishness, putting it in the long-term range of 275p to 356p.

Kingfisher chart

Kingfisher chart

Kingfisher chart

Smiths Group (full-year earnings 21 September)

Smiths is expected to report a 6.8% decline in earnings, to 91p per share, while revenue falls 0.3% to £3.2 billion. The firm has beaten estimates in seven of the last eight reports for earnings, but missed in five of the last eight for revenues. The average move on results day is 3.05%, but current pricing suggests a move of 4%.

The firm will need to present a compelling plan at its full-year results, given the pressure that is building to break up its current structure, following the problems faced at General Electric (GE). It has already warned that performance at its medical unit would be weaker, so unless this is much worse than forecast the impact may be muted. At least the weaker pound may provide some relief.

Smiths currently trades at 15.3 times forward earnings, a shade below its five-year average of 15.6, but this is much cheaper than the global peer group average of 27.5 times forward earnings.

The recent bounce in the share price has created a new higher low, and further gains will target downtrend resistance from the June highs, around £16.20. From here, £16.80 comes into view.

Smiths Group chart

Smiths Group chart

Smiths Group chart

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