Earnings look ahead – Ocado, Kingfisher, Babcock

A look ahead to earnings next week.

Ocado shares
Source: Bloomberg

Ocado (Q3 trading statement 19 September)

It’s tough to be a UK supermarket at the moment, even an online one, as Amazon looms on the horizon as a potential major competitor. One of the supermarkets in question, Morrisons, has already succumbed to Amazon’s overtures, allowing its products to be sold through the online marketplace. The most recent half-year figures were encouraging, but we still have little news on its deals to license its software to other firms. At almost 200 times forward earnings, Ocado remains very much about the growth story. Although, it has outperformed the comparable peers index on the FTSE 100 so far this year, up 12.6% versus a broader decline of 2.5%.

Ocado shares have stumbled below 320p three times since June, as the spike to 340p unwinds. However, we have seen steady higher lows since March, so the energy for a breakout could be building. The barriers on the upside are 320p and 340p, followed by 354p. A break below 280p would cancel out the steady sequence of higher lows.

Kingfisher (Q1 results 20 September)

A fall in like-for-like sales of 1.7% in the most recent quarter is hardly encouraging, but investors are hoping that cost cutting and efficiency savings will help offset the declines. Kingfisher's saving grace is its Screwfix division, which continues to record healthy growth. A strong dividend, on a yield of 3.6% and covered more than twice over by earnings, along with net cash of over £600 million, provide plenty of attraction for income hunters. In addition, the shares trade at 12.1 times forward earnings, below the two-year average of 14.3. Earnings are expected to fall 20% to 10.8p per share for the first half, while revenue is forecast to rise 4.5% to £6 billion.

Kingfisher continues to head towards the 2014 low at 283p. A break below here targets 267p and then 260p. A turn higher from here would test 300p and then 312p, and overall the shares remain in a long-term range from 283p up to 390p.

Babcock (trading statement 20 September)

Hope seems to spring eternal for Babcock, but the ongoing decline in the share price shows that sentiment remains weak. Still, it did see profits rise 10% in May, with a similar rise in the dividend. Brexit continues to hang over the company but, at just ten times earnings, the firm looks to have strong value credentials. It also trades at a hefty 43% discount to its sector peers, further enhancing its attractiveness as a potential turnaround play, with plenty of bad news already in the price.

The weekly chart of Babcock offers the hope of a short-term rebound, if the shares can turn back above 820p. A rally back towards 940p could be possible, but then sellers are likely to take over. Since the beginning of 2014 rallies have been firmly sold, and a move back above 1000p would be needed to negate this outlook. The July 2011 high of 736p is the next area to watch on the downside.

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