Earnings look ahead – Bunzl, Petrofac, WHSmith

Petrofac (first-half earnings 29 August)

Petrofac is forecast to see a 14.6% drop in earnings for the first half, to 39.3 cents per share, while revenue is expected to drop by 8% to $2.86 billion. The stock has missed earnings four out of the last seven times, and missed on revenue five out of the last seven. The average one-day move on results day is 3.45%, but current pricing points to an 8.85% move.

Order intake has been improving, supporting revenue outlook for this year, but the travails of continuing impairments and the Serious Fraud Office (SFO) investigation have acted to depress sentiment towards the shares. As last year, earnings are expected to be weighted towards the second half. Still, with net debt remaining relatively high, order intake needs to remain robust.

At 9.7 times forward earnings, the shares are broadly in line with the five-year average of 9.1, but are at least less expensive than the 10.6 seen earlier in the year. Its peers trade at 22 times forward earnings, but, given the uncertainty hanging over the firm, that discount seems justified.

The rising trend is still intact here, with higher lows in place since June 2017. Now the shares are heading back to the £6.60 level that stymied progress back in May. From here, £6.94, £7.10 and then £7.76 come into view as upside targets, while dips towards near-term trendline support around £5.85 could find buyers.

WHSmith (Q4 trading statement 30 August)

WHSmith is expected to reiterate its plans for further international growth at its upcoming update. The move into Spain comes as the country’s economy stages a recovery, and tourism is expected to pick up across the rest of Southern Europe as well. Cost-cutting and better gross margins have helped to improve the underperforming UK high street division, with a new format trial being expanded to ten stores in order to improve the mix of products on offer.

At 15.7 times forward earnings the shares are above the five-year average of 15.7, and the stock now trades at a 14% premium to its peers in the sector, compared to a 3% discount over the past two years. This suggests much of the ‘good news’ is now in the price, and the firm will need to demonstrate even more impressive international expansion to avoid a correction in the near term.

The shares remain in an uptrend from the July 2017 lows, but are also stuck with a series of lower highs from the December 2017 high near £23.00. A breakout from this downtrend would challenge £21.20 and then £21.80 before moving on to £23.00. A retracement would find support at the post-July 2017 rising trendline, around £19.50, with the loss of this opening the way to £19.00 and then £18.40.