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Earnings look ahead: Berkeley Group, Barratt Developments, McCarthy & Stone

A look at company earnings next week.

Berkeley Group
Source: Bloomberg

Berkeley Group (Q1 update 5 September)

Full-year results from the firm saw Berkeley upgrade its targets for the coming years, but there was caution over the outlook for the key London market. We will get further detail on this at the first quarter (Q1) update, which will likely be key for share price direction. Strong forward sales and a well-maintained balance sheet do mean that the firm is well prepared for any downturn, something to bear in mind as the country heads towards key Brexit deadlines. At ten times forward earnings the shares are now priced in line with their five-year average, having been one standard deviation above it earlier in the year.

Berkeley’s shares have dropped back from their mid-year highs to the crucial £36.00 support zone. This has held since the middle of July, as it did in February and March. A break below this brings the July low of £35.00 into play. A recovery above £37.00 breaks the current narrow trading range, and would suggest a move back towards £39.08 in the near term.

Barratt Developments (full-year figures 5 September)

Barratt is expected to report earnings of 66.3p per share for the year, up 8.2% over the past 12 months, while revenue is forecast to rise 4.9% to £4.88 billion. It has beaten estimates for the former in six of the last eight reports, and seven of the last eight for the latter. The average move on the day is 3.36%, with current options pricing suggesting a 2.4% move.

While the Bank of England (BoE) did raise rates in August, the overall cost of borrowing still remains low, which will continue to provide a boost for Barratt. A strong balance sheet will also help it ride out any Brexit-related volatility. At just 7.8 times forward earnings it remains more than one standard deviation below the five-year average of 9.8, while its current forward operating margin is 18% versus a six-year average of 14.8%.

Although the shares have rebounded from their July lows, momentum is fading as the price heads towards trendline resistance from the 2018 highs. Crucially, we have seen negative divergence between the price and the stochastic momentum index, a potentially bearish signal. A break above £5.60 would mark a bullish development, bringing £5.77 and £5.88 into play. Any failure to maintain upward momentum raises the risk of a new lower high being created and the price moving lower towards support at £5.13.

McCarthy & Stone (Q4 update 6 September)

The June profit warning sent shock waves through the shares, and it's now up to McCarthy & Stone to provide some reassurance on the outlook for reservations. Brexit will also feature as a headwind to further progress, in common with the rest of the sector. Worryingly, the shares are now at ten times forward earnings, well above the five-year average of 9.3. A high dividend yield of 5.1% versus the sector average of 3.3%, and one that is well above the two-year average of 2.6%, means that income hunters should treat this stock with care.

Rallies have been sold in this firm for more than a year, and it looks like a similar situation is developing at present, with negative divergence between the price and stochastics (i.e. the price is moving higher while stochastics move lower). The price has been unable to break above the 114p level, the bottom end of the June gap lower. This would suggest that a retracement is underway, with the 96p low as a possible target. The overall bearish view persists unless the price moves above 135p in the first instance, creating a new higher high.

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