Earnings look ahead – Marks & Spencer, United Utilities, Kingfisher

A look ahead to company earnings next week.

Marks & Spencer shopper
Source: Bloomberg

Marks & Spencer (full-year earnings 24 May)

Being optimistic on Marks & Spencer has the whiff of a contrarian trade about it: of 27 broker ratings, 12 are currently sells. But perhaps, it is time to be more optimistic. The firm has pulled off two major coups in staffing terms, hiring retail legend Archie Norman as its new chairman and Halfords CEO, Jill McDonald, who is going to have a go at running the clothing business, long a major problem for the firm. Food continues to do well, and remains the major engine of revenue growth. And, if McDonald can put in a good performance in clothing, it will provide significant tailwinds for performance. Archie Norman’s magic may take more time to work on such a big canvas, but the appeal of retail’s ‘turnaround king’ will be hard to resist for many investors. Earnings are expected to be down 17% year on year (YoY) at 29p per share, while revenue is forecast to rise 0.3% to £10.59 billion. The forward price/earnings (PE) is 13.2 times.

The shares have finally broken above a trendline that goes back to the May 2015 high, and which was last tested in November 2015. The next upside targets to watch are 391p, 408p and then 448p, the 2016 second quarter (Q2) high. A drop back below 380p risks move back to 360p in the short term. 

United Utilities (full-year earnings 25 May)

United Utilities have been in the spotlight as Labour promises to go on a nationalisation spree in its election manifesto. The reaction was muted however, as given current polling there seems little chance of Jeremy Corbyn getting anywhere near Downing Street. The key point for the industry will come later in 2017, when the next regulatory review is completed. United Utilities is expected to report earnings of 46p per share, down slightly YoY, while revenue is expected to edge down 1% to £1.72 billion. The shares currently trade at 22 times forward earnings.

The rally from the autumn 2016 lows faltered in April, but dip buyers came in to rescue the uptrend. The recovery over the past few days means that the £10.31 level could be challenged once again, with a move above here opening the way to £10.64 and the June peak.

Kingfisher (Q1 trading statement 24 May)

Recent comment has focused on Kingfisher's Screwfix division, which some analysts argue is being materially undervalued in relation to the rest of the business. The division has seen an improvement in turnover and profits, while there is the potential for expansion overseas. In addition, each Screwfix store provides double the profit margins of a comparable B&Q, with greater sales density. Strength here should be seen as a positive, even if the other divisions show weakness.

Since late 2014 the shares have been trading in a range from 283p up to 390p. In mid-2016 they found support at 300p, and then pushed back to 390p resistance. From November, a sustained downtrend took them back to 312p. Now they are on course to test the November high at 371p, and above here we may see a continued push back to 390p. 

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