Earnings look ahead – Antofagasta, Prudential, Sainsbury’s

A look at UK companies reporting earnings next week.

Source: Bloomberg

Antofagasta (full-year earnings 14 March)

Like many mining stocks, Antofagasta has rallied strongly over the past year, but in the last couple of months we have seen around 17% shaved off the share price. However, the improved pricing outlook seems to offer better times ahead. Cost-cutting and a reduction in operations has helped to ease the pressure on margins, and the expectation is that pre-tax profit will surge to over £700 million in 2016, from just over £200 million a year earlier. In addition, dividends are expected to recover as the miner seeks to return cash to shareholders. Moreover, dividend cover is 2.9 times so there is little risk of a drop in payouts any time soon.

The pullback over the past month or so has put a dent in the uptrend, but leaves it intact. Any recovery back above £7.80 would be the signal that the dip is over and more gains are on the way. A daily close below £7.22 would suggest further weakness, in the direction of £6.50.

Prudential (full-year earnings 14 March)

The long pullback from all-time highs in Prudential took it from £17.50 in early 2015 to a low of under £11 in 2016 (in February and June). Since then however, it has staged a remarkable recovery, with a furious dip in November around £13 being equally furiously bought. It is clear the pivot to Asia is proving sensible, and with earnings expected to double over the next five years, the forward P/E of around 13 is not particularly expensive. Full-year earnings are forecast to see £1.145 per share, down 9% year on year, while revenue is expected to rise by 50% to £61.9 billion.

A dip at the end of January saw buyers enter around £15.20, but gains since then have run into difficulty around £16.50. A daily close above here would target £16.88 and then back to the all-time high at £17.61.

Sainsbury’s (Q4 earnings 16 March)

Earnings from the big supermarkets are always closely watched for clues about consumer spending, as much as for indications of performance for the firm itself. Sainsbury's market share declined in the 12 weeks to 28 February, according to Kantar data, but only slightly, with the big four managing to hold their ground against German competitors, Aldi and Lidl. Higher costs due to a weaker pound continue to be the major bugbear here, along with a tight pricing environment that limits Sainsbury’s ability to raise prices. At 13.2 times forward earnings, the shares are now looking rather expensive (versus a five-year average of 11.4). Last time they were this expensive was in spring 2015 and 2016, after which they fell heavily to support around 220p.

Upward momentum has stalled at 270p in 2017 so far, thus it looks like those valuation concerns are coming home to roost. Further share price weakness would head towards 244p, the 200-day simple moving average, and then down to 220p, where significant support has been found since late 2014. Down here the shares are a bargain, but at present levels they look rather pricey. 

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