Earnings look ahead – Bunzl, Petrofac, WHSmith

First-half numbers from packaging firm Bunzl and oil services firm Petrofac are scheduled for next week, along with a trading update from retailer WHSmith.

Source: Bloomberg

Bunzl (first-half earnings 28 August)

Bunzl is expected to report 7.3% growth in first-half earnings, to 59.1p per share, while revenue is expected to rise by 4.3% to £4.3 billion. The firm has beaten estimates on both metrics in six of the last seven earnings reports. The average move on results day is 1.97%, while current options pricing suggests a 3.16% move.

Last year saw a higher-than-normal level of acquisitions, even for this serial acquirer. New business in North America has been a key driver of growth, but the second quarter’s (Q2’s) 4% growth, down from 6% in Q1, suggests the overall rate of growth is still likely to slow. Second-half margin weakness in 2017 needs to reverse in order to maintain investor enthusiasm, and the weakening of sterling should provide an earnings tailwind.

At 18.2 times forward earnings the stock is only slightly below its five-year average of 19.3, having been a ‘value play’ (relative to historical levels) back in early 2018 when the forward price-earnings (PE) ratio dropped down to 16. The bullish case is undermined to some extent by the fact that earnings are expected to grow by 4% over the next three years, versus a 10.8% average over the past five years.

The long-term trend in Bunzl is still intact, even if the price has not been able to hold above the £23.50 highs from June, and the £24.12 high is still a longer-term goal. Dips towards £22.30 since June have found buyers, so we either need a close above the June high of £23.60, or a close below £22.20.

Petrofac (first-half earnings 29 August)

Petrofac is forecast to see a 14.6% drop in earnings for the first half, to 39.3 cents per share, while revenue is expected to drop by 8% to $2.86 billion. The stock has missed earnings four out of the last seven times, and missed on revenue five out of the last seven. The average one-day move on results day is 3.45%, but current pricing points to an 8.85% move.

Order intake has been improving, supporting revenue outlook for this year, but the travails of continuing impairments and the Serious Fraud Office (SFO) investigation have acted to depress sentiment towards the shares. As last year, earnings are expected to be weighted towards the second half. Still, with net debt remaining relatively high, order intake needs to remain robust.

At 9.7 times forward earnings, the shares are broadly in line with the five-year average of 9.1, but are at least less expensive than the 10.6 seen earlier in the year. Its peers trade at 22 times forward earnings, but, given the uncertainty hanging over the firm, that discount seems justified.

The rising trend is still intact here, with higher lows in place since June 2017. Now the shares are heading back to the £6.60 level that stymied progress back in May. From here, £6.94, £7.10 and then £7.76 come into view as upside targets, while dips towards near-term trendline support around £5.85 could find buyers.

WHSmith (Q4 trading statement 30 August)

WHSmith is expected to reiterate its plans for further international growth at its upcoming update. The move into Spain comes as the country’s economy stages a recovery, and tourism is expected to pick up across the rest of Southern Europe as well. Cost-cutting and better gross margins have helped to improve the underperforming UK high street division, with a new format trial being expanded to ten stores in order to improve the mix of products on offer.

At 15.7 times forward earnings the shares are above the five-year average of 15.7, and the stock now trades at a 14% premium to its peers in the sector, compared to a 3% discount over the past two years. This suggests much of the ‘good news’ is now in the price, and the firm will need to demonstrate even more impressive international expansion to avoid a correction in the near term.

The shares remain in an uptrend from the July 2017 lows, but are also stuck with a series of lower highs from the December 2017 high near £23.00. A breakout from this downtrend would challenge £21.20 and then £21.80 before moving on to £23.00. A retracement would find support at the post-July 2017 rising trendline, around £19.50, with the loss of this opening the way to £19.00 and then £18.40.

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