Earnings look ahead – Bellway, Games Workshop, Tesco

A look at company earnings next week. 

Tesco
Source: Bloomberg

Bellway (Q3 trading statement 12 June)

Bellway continues to do well, as exemplified in its first-half results recently. A higher level of demand for bricks and tiles has hit the pace of construction, while the fall in the value of the pound has also boosted the cost of imported materials. Still, the firm expects a record number of completions for its full-year, and the 7.7 forward price to earnings (PE) ratio and 3.9% yield versus a 2.3% payout for peers continue to boost the attractiveness of the shares.

Bellway shares have rallied sharply off the lows of the week around £32.20, and are now pushing towards the £34.40 area that stalled progress in May. This would also bring them into contact with trendline resistance from the October high, so we are at a fairly crucial point. A break towards £35.00 would likely see further momentum develop over the longer term towards £37.00, and mark a more bullish turn after eight months of declines. A failure would see a move back towards £32.50, but a break of rising support from the March lows needs a close below £32.00.

Games Workshop (full-year earnings 11 June)

Games Workshop earnings are expected to rise 87% to £1.87 for the year, while revenue rises 37% to £217 million. The business has managed to carve out an excellent performance despite difficult comparatives, with the improvement coming from its loyal fanbase. This seems to have defied the slowdown in UK consumer spending, presumably since the company’s customers are keen hobbyists, regardless of the broader macro backdrop. Crucially, its overseas sales, which make up 70% of sales and come from the US, Australia, China and Japan, have been a key driver of growth, helping to counteract any UK weakness. The run-up in the shares has pushed the forward PE higher, to 21.3 versus a two-year average of 14.8, but the 4.6% dividend yield is comfortably above its two-year average of 3.3%.

The shares have surged by 250% over the past 12 months, with each dip being a buying opportunity. Now we have seen some weakness develop above £30.00, but if the shares can hold £28.50 then short-term momentum buyers may look to enter. However, a deeper retracement towards £26.00 would likely provide a more attractive buying opportunity in risk-reward terms.

Tesco (Q1 trading statement 15 June)

Full-year figures from the Tesco seem to suggest that it is well-placed to deliver further earnings growth, due in part to in-store cost savings running ahead of the 2019/20 target of £1.5 billion. The ongoing slowdown in UK inflation means that the firm will have to work hard on volume growth, but of course this must be done without sacrificing too much margin growth as the group pushes towards its 3.5%-4% operating margin target. At 17 times forward earnings, the shares are in line with their average valuation over the past five years.

Tesco shares hit their highest level in three years during May, moving towards the 252p peak that marked the zenith in 2015. The break of the 2017 highs around 219p proved decisive in April, sending the shares leaping higher. Near-term weakness may provide a more interesting buying opportunity if a retracement develops towards 227p, the top-end of the 12 April gap higher. 

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