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Earnings look ahead: United Utilities, Compass and Kingfisher

A look at three major companies with updates next week.

US trader
Source: Bloomberg

United Utilities

First-half figures from United Utilities (UU) arrive next week, with the shares having fallen 18% from their summer peak above £10.

Utilities firms have been hit hard recently by the bond market sell-off, as investors shift some money from utilities to bonds as a result of the move higher in yields. There was perhaps some expectation that Donald Trump’s victory would decrease the chances of higher interest rates, but this hope has diminished somewhat. Nonetheless, the income perspective should not be overlooked here, and while a liberalisation of the water industry could help the business, it is true that most investors continue to use utilities as income sources. In addition, the lower volatility offered by utilities is another point in their favour.

Shares in UU have gone nowhere since the end of 2014, with the early 2015 rally to £10.44 then seeing a drop. The shares hit this level (and did move above it) in July 2016, but since then they have continued to fall, moving below the £8.84 low of February. They have bounced since then but so far are not able to close above this level. A further move lower would test the August 2015 low towards £8.16.

UU

Compass

Although not technically a utility, Compass Group has been behaving like one lately, given the predictability of its income streams and its dividend yield. As a result, the shares have come off sharply since their October all-time high. Full-year earnings will be posted on 22 November, with adjusted earnings expected to rise 12% and revenues expected to be 11% higher.

The shares were looking expensive by this point, even if the company’s share price has been on a rally that has lasted almost a decade. Operating margins last year were flat at 7.2%, and there is definite concern that the firm could see increased pressure as costs start to rise. At 19.5 times forward earnings, the shares are off the highs of October, although they are above the average of 18.5 times seen over the past five years.

The shares recently fell below the 200-day simple moving average (SMA) for the first time since January, and crucially they have yet to break back above this level. Although this has wiped out most of the gains made since June, we could still see a rebound. Seasonality suggests that the shares will recover into the end of the year, along with the broader market, with the average return over the past 13 years being 4.6% in November and 3.9% in December. 

Compass

Kingfisher

A trading update from the DIY firm is expected on 22 November. In its last update, the company said that it had seen no impact on demand from the EU referendum, but it is likely that this will still feature heavily. Strong cash generation and healthy operating margins have helped the firm, with a buyback programme boosting the share price.

UK consumer spending has held up relatively well since the Brexit vote, but there are signs of impending cost inflation, which may act as a drag on spending in the new year. We could be entering a period of cyclical weakness, which would then raise the prospect that Kingfisher shares could endure a re-rating. At 15 times forward earnings, the shares do not look either over- or undervalued, although at just 1.3 times book value they do have some ‘bargain basement’ attributes.

The share price has, since early 2015, run into significant resistance around 380p, so with the shares near the top end of this range we might see upside momentum begin to slow. A breakout above 380p would see the shares have a clear run towards 440p.

Kingfisher

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