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Earnings look ahead - Marks & Spencer, Inmarsat, Sainsbury's

Retailer Marks & Spencer, satellite communications firm Inmarsat and supermarket Sainsbury’s report earnings next week.

CFDs are a leveraged product and can result in losses that exceed deposits. Trading CFDs may not be suitable for everyone, so please ensure you fully understand the risks and take care to manage your exposure.
Marks & Spencer
Source: Bloomberg

Marks & Spencer (first-half earnings 7 November)

Marks & Spencer (M&S) is expected to report a 6.4% drop in headline earnings, to 10p per share, while revenue is only expected to dip by 0.9% to £5.08 billion. The average move on results day is 4.56% while current options activity suggests a move of 4.4%.

For M&S, the focus remains on cost-cutting and making sure the food division continues to gain market share, which remains relatively low compared to its rivals. A reduction in store numbers will of course hurt market share in the near term. A shift to full income statements for the clothing division will also help to progress the painful process of realising that this arm is no longer a powerhouse for Marks & Spencer. At 11.5 times earnings, the shares are broadly in line with their five-year average valuation of 12.4, and while this is not exactly inspiring the shares trade at a 23% discount to peers, versus a more usual 29%, indicating that near-term upside may be limited.

The shares have rallied off the lows of the year and have remained notably immune to the general sell-off in the broader FTSE 100. However, they have now run into resistance around 300p, coinciding with the downtrend line from the 2017 highs. A breakout above here targets 307p and 314p in the near term, while a decline would see the shares head back towards rising support from the 2018 lows, around 285p.

Inmarsat (Q3 earnings 8 November)

Inmarsat is forecast to see a 22.5% drop in earnings for the quarter, to 9.3 cents per share, while revenue at least is forecast to rise 2.8% to $368.5 million. Results day usually sees the shares move 7% on average.

Steady expansion is expected for the quarter, with stronger growth likely in the aviation division thanks to expansion in its core products such as in-flight connectivity. Further marketing spending and investment in expansion in the aviation division will bear down on margins, but overall earnings growth is expected to continue. At 30.2 times forward earnings, the shares are more expensive than the five-year average of 24.2, while its dividend yield of 3.1% is below the two-year average of 5.8%.

Inmarsat shares have been in a downward channel since May 2017, with a sharp rally almost a year on from that peak creating a notable lower low. The price continues its bounce from the lows of the year, and has rising trendline support from the May low, having moved from around 450p over the past week. Further gains target recent resistance at £5.20 and then on to the top end of the channel just above £5.50.

Sainsbury’s (first-half earnings 8 November)

Sainsbury's is expected to report a 17.4% rise in earnings, to 9.7p per share, while revenue inches up 1.1% to £14.8 billion. On average, the share price moves 5.8% on results day, but current options pricing indicates a move of 4.13%.

While the Asda tie-up is not a done deal, the winds appear to be shifting, with the Competition and Markets Authority (CMA) likely to allow the merger without forcing through a large number of store disposals. Tesco and Morrisons are both enjoying the benefit of new convenience stores, but Sainsbury’s has lagged behind here and so its performance is likely to be weaker than its competitors. Same-store sales may also drop as the introduction of Argos concessions continues, hitting general merchandise revenue, while weaker food price inflation may also hurt like-for-like sales. At 15 times earnings, Sainsbury’s is now firmly above the five-year average of 12, and is far from the bargain on valuation grounds that it was towards the end of last year and into early 2018. In addition, it trades at a premium to its peers of 6%, versus an average 15% discount over the past two years.

The shares declined in line with the broader market during the late summer and early autumn, but have crucially held above the lows of May. A rally from just below 300p has seen them take out trendline resistance around 310p, and a move above 318p would clear the previous high and open the way to 325p and then 342p. A move back below 310p signifies that the sellers are back in control.

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CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.