Earnings look ahead: Next, Just Eat and BT

Trading statements from Next and Just Eat, and first-half numbers from BT are key company earnings to watch out for.

BT
Source: Bloomberg

Next (Q3 trading statement 31 October)

As other rivals flounder, with Debenhams being the perfect example, Next’s online arm remains the company’s (not so) secret weapon. Its online division is set to receive more resources, and overseas sales are becoming another focal point.

A drop in profitability in the first half underscores the challenge, even as it works hard to keep costs under control and boost gross margin. While it remains determined to stick with bricks and mortar stores, it has made preparations to reduce its commitment to the high street, if and when that becomes necessary. At 11.5 times forecast earnings, the shares are at their cheapest level in several months, and are well below the 13.8 five-year average.

Next shares have fallen out of the rising channel that held through the second half of 2017 and into 2018. Rallies in September and October brought out the sellers, and if the price cannot recover £52.60 then further downside towards £44.91 seems likely.

Just Eat (Q3 trading statement 1 November)

Key questions to resolve for Just Eat include how warmer weather affected trading in July and August, and whether there was any recovery in September. The company faces a much more competitive environment as rivals like Deliveroo and Uber Eats move into the space.

Further investment in operations will eat into margin, and a weaker top line in the crucial UK market means that the Q3 statement may not have much in the way of good news. Compared to its rivals, Just Eat’s restaurant sign up efforts have not borne significant fruit, so investors are beginning to fear that the ‘first mover’ advantage is starting to wear off. The shares are now at their cheapest in two years, at 26.7 times earnings, versus a two-year average of 33.6, but even this re-rating may not have gone far enough.

The uptrend in Just Eat that seemed so impervious to bad news came to an end in August, with the price crashing through trendline support. It is currently fighting to hold the £5.96 area, the low from August 2017. A further bounce would target the £7.50 zone, and thus hit the trendline from below, while further declines bring £5.43 and 498p into view as support.

BT (first-half earnings 1 November)

First-half figures from BT are expected to show a 1.3% drop in earnings per share (EPS), to 12.5p, while revenue falls 2.2% to £11.53 billion. The average move on results day is 2.7%, but current options pricing suggests a move of 5.77%.

The incoming chief executive officer (CEO) will arrive too late to stamp much of his new style on the company, but it does promise a much-needed overhaul. Increasing regulation, pension deficit contributions and ongoing spending on 5G and full-fibre connections mean that costs will keep rising. Overall the firm will have to start cutting costs in due course, but it could be a while before this has a meaningful impact. The new boss has to find a way to arrest the decline in earnings, since if it keeps going a cut in the dividend becomes a much more meaningful possibility.

The forward price-earnings ratio (PE ratio) has risen from its low in early 2018 around eight, to a current nine times forward earnings, still well below the two-year average of 12.1. While cheap, the significant problems facing the firm mean that not all of the bad news is yet in the price. However, the shares have seen notable strength of late as US hedge fund Greenlight Capital has taken a stake in the firm as it looks to put pressure on management to spin out Openreach from the telecom service. Such a move might unlock value, but it is far from clear whether the board is keen on this approach.

It may be that BT shares have established a new trend, having turned higher from their lows in May. They breached the 1 May high at 241.2p before falling back, but remain in an uptrend, with higher lows in place since May.

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