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Earnings look ahead – Lloyds, Glencore, Barratt Developments

A look ahead to earnings next week. 

Barratt Developments
Source: Bloomberg

Lloyds Banking Group (full-year results 22 February)

While US banks can look forward to an environment of rising rates and looser regulation, UK banks have to deal with Brexit and a not-too-keen on increasing interest rates Bank of England (BoE). However, Lloyds has some benefits going for it; the government’s stake is getting steadily smaller, unlike at RBS, with the return to full private ownership now within a touching distance. The bank is also fundamentally cheap, at around 8 times forward earnings. Throw in a decent dividend of 3.4% that is expected to move towards 6% by the end of 2017 and the shares start to look very compelling.

Lloyds’ shares started the new year in fine form, breaking the downtrend that has prevailed since mid-2015. Since then they have consolidated and begun to push higher. The next target is 72p, the pre-Brexit peak, with 73.8p the one to watch if this is broken. A move below 62p would raise the prospect that the current rally has run its course.

Glencore (full-year earnings 23 February)

The rally in commodity prices has made Glencore a much more attractive business, even with ongoing debt reduction efforts. Towards the end of 2016 the firm said it was expecting $6.5 billion in free cash flow for 2017, along with $14 billion in profit. With further rises in commodity prices, some brokers have begun to upgrade their forecasts to suggest that the miner will make an extra $600 million in free cash flow.

Since the US election, base metals have seen significant price increases, and Glencore’s exposure to these makes it ideally placed for further gains. At 14 times forward earnings Glencore trades in line with the average of the past five years, suggesting the shares are not overly expensive.

Glencore hit 333p early in 2017, reaching the highest level since November 2014. The surge from the 2016 low near 80p has been remarkable. However, while the upward progression has barely stopped in the past six months, the shares now look overextended with a significant gap between the current price and next support at the late December lows around 264p. But given the fundamental backdrop, a post-results sell-off should provide a good opportunity to hop on board a strong trend.

Barratt Developments (first-half earnings 22 February)

Barratt’s first-half numbers should provide a useful insight into whether the current valuation, at just 1.2 times price to tangible net assets, is understating the outlook for the firm. The company’s London focus does leave it open to downside risks if the property market in the capital begins to cool.

The recent departure of the firm’s CFO is a disappointing development, but the first-half figures should provide Barratt with an opportunity to reverse the negative sentiment created by its warning in January that it had suffered a sharp drop in the number of homes built in London.

The big level to watch here is 522p. Since September several rallies have petered out below this point. The price has bounced impressively over the past three weeks, but with momentum indicators looking overextended it may be hard for a real breakout to occur. A move above 522p would head towards 539p, and then on to 580p. But it will take some real legwork for the bulls to break the steady downward move off the 2015 highs. 

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