Earnings look ahead – Shire, Rolls-Royce, TUI

A look to earnings from companies reporting next week.

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Source: Bloomberg

Shire (FY earnings 16 February)

Currency movements should provide quite the boon for Shire, with sterling weakness doing much to flatter the bottom line, at least on an adjusted basis. However, integration from recent acquisitions will inevitably increase costs, although revenue growth of 7% is still expected.

The new drug Xildra, used to treat dry eye disease, has had a relatively successful launch, which is expected to result in a confident outlook for the year. Also worth watching out for will be the integration of the Baxalta business, having exceeded expected synergies of $600 million in its first year. Pharma firms have the new administration in the US to worry about, with possible ramifications from potential changes to healthcare provision being a key concern.

Having rallied off the February lows, the shares topped out near £54, and have seen a steady sequence of lower highs and lower lows since September. Big support has been found around £43, while the recent bounce off this level has carried the price back to the 200-day simple moving average (SMA) at £46.73, with the January peak at £49.36 the next area to watch. 

Rolls-Royce (full-year earnings 14 February)

Top of everyone’s concerns for Rolls-Royce will be its US business, and whether the bribery scandal has hit performance there. Expectations are for a (albeit, slight) drop in sales, as sales of new engines have come at the expense of older models. In addition, there may be a hit to earnings as a result of FX hedges post Brexit.

Adjusted earnings are forecast to be 24.3p per share, down 58% from a year earlier, while revenue is expected to decline 1.8% to £13.5 billion. At 25 times forward earnings the shares are not as expensive as in the summer, when they traded at 28 times, but they are well above the five-year average of 17 times.

The shares are still in an uptrend (A) from the January 2016 lows, with a dip at the beginning of 2017 finding buyers. They now need to post a daily close above the descending trendline (B) from the July highs, which would open the way to 790p, the October high. 

TUI (Q1 trading update 14 February)

Sector peer Thomas Cook took a heavy knock this week after a cautious statement, so TUI will be hoping it can avoid similar treatment. The firm is on the cusp of the vital booking season for summer holidays, having said in December trading was in line with expectations. The German unit said recently bookings were significantly above levels seen a year ago, so if the UK arm replicates this the shares may see a rerating. At 12 times forward earnings the valuation looks relatively undemanding, although the risk of further terror attacks is one risk to the share price.

The shares broke the descending trendline off the 2016 high back in December, and then fell back to it and rallied, so it looks like the bulls are in charge now. Faltering momentum may indicate sustained profit taking, but so long as the rising trendline off the June lows (B) holds, then it could prove to be a good buying opportunity when the bounce materialises, with a first target being the 2017 high at £12.

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