Earnings look ahead – Tullow Oil, Whitbread, Serco

A look at company earnings next week.

Costa
Source: Bloomberg

Tullow Oil (Q2 update 27 June)

Ghana-related production concerns seem to have subsided for Tullow Oil, with production expected to keep rising as the year goes on. The shares continue to look attractive on relative valuation grounds, at just 10.6 times forward earnings versus a 21.2 times two-year average. A brighter outlook thanks to the Organisation of the Petroleum Exporting Countries (OPEC) should mean that oil prices will provide a supportive cushion heading into the rest of 2018 and into 2019.

Tullow shares found support around 223p in June, and a move above 236p would suggest that a new higher low has been created, with a move to 280p looking likely. The shares have been steadily rising since the nadir back in June, bolstered by the rising price of oil. A close below 223p would create a more bearish short-term view.

OPEC meeting

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Whitbread (Q1 update 27 June)

The corporate restructuring story is finally on the agenda here, as Whitbread looks to spin out Costa from the overall group. JPMorgan has argued that the sale of Costa would create proceeds of £1.2 billion, helping to offset ongoing cost inflation and weakening like-for-like growth in both the hospitality and Costa divisions. The UK retail backdrop has not been encouraging, but the return of better weather may help improve performance in the next few months.

Whitbread shares have spent more than two years stuck below £42.00, and so far a push above this level this year has merely resulted in more selling pressure. A move below £40.77 has seen more selling, with a failure to regain this level indicating a potential move back towards the lows of the past year at £36.00.

Serco (first-half update 29 June)

Serco’s update will likely contain further updates on cost savings, building on the £100 million delivered over the past three years. In addition, news on reduction of costs relating to project overruns may help bolster sentiment. A decline in the contract pipeline has been flagged before, but the order book should see further improvement, having already secured 85% of revenues for the 2018 financial year. At 21.7 times forward earnings the stock is not cheap, but it is at least on a less demanding multiple than the two-year average of 35.3.

The downtrend that has been in place since the beginning of 2017 shows no sign of abating. A rally in June towards 105p brought out the sellers, although for now rising trendline support from the February low has prevented further downside. Below 93p, the 82p level comes into view. A close above 103p is needed to break trendline resistance from the January 2017 high. 

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