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Earnings look ahead: Whitbread, Barclays, IAG

A variety of UK firms update the market this week, including hospitality firm Whitbread, global bank Barclays and international airline firm IAG.

Source: Bloomberg

Whitbread (first-half update 23 October)

Whitbread’s decision to sell off its Costa Coffee division will allow the firm the time to focus on its other brands, notably its Premier Inn arm. The division has growth possibilities in Germany, to add to its existing strength in the UK, while a downturn in consumer spending in this country is not likely to hurt performance, given Premier’s position at the budget end of the hotel market.

Whitbread is expected to report earnings per share of 132p, down 8.1% over the year, while revenues are likely to fall 15% to £1.42 billion. It has beaten earnings forecasts in seven of its previous updates. At present it trades at 16.8 times forward earnings, just below the 17.2 five-year average but it also trades at 24% discount to its peers, compared to an average discount of 38% over the past two years.

Whitbread has gapped higher twice so far this year, and while it has retraced towards £45.00 and the top end of the latest gap up, the sequence of higher lows from the end of last year remains in place. Below £45.00, £44.00 and then £43.33 come in as possible support, while a breakout requires a move above £48.00.

Barclays (Q3 update 24 October)

It has been a tough time for UK banks, and Barclays has not escaped the malaise. A potential downgrade of UK banks in the event of a no-deal Brexit has weighed on the sector, and a 29% drop in first-half profit has not helped sentiment. However, it does trade at just 0.4 times book value, and is currently on a forward price-earnings (PE) of 7.3, versus a five-year average of 9.5. This is the cheapest level since early 2016 and at such a level much of the potential bad news surrounding the UK economy and potential charges arising from the Serious Fraud Office (SFO) investigations are broadly factored in.

Traders have been selling the rallies in UK banks over the summer, and any rebound needs to clear the 175p-180p zone, which marks the September highs. Further declines will target 151p and then 138p.

IAG (Q3 update 26 October)

International Airlines Group (IAG) currently trades at a bargain basement valuation of 5.4 times forward earnings, the lowest level since the second half of 2016. Disruption from French traffic control strikes has not helped sentiment, and rising fuel costs spell increased difficulty ahead, but the firm has stuck to its previous guidance. The solid 3.7% yield is also covered several times over by profits, adding further to the attractiveness of the stock on a fundamental basis.

However, the picture on a price basis is not so attractive. The shares are testing the waters below the £5.75 support zone that has been a solid area of buying since the middle of last year. One area of potential support is £5.00, but the shares have barely been able to rally over the past two months. Any rally that fails to clear £6.18 is likely another selling opportunity.

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