Portfolio

Plant closure holds back profit growth at GKN

Date: Wednesday 19 Oct 2011

London open

City sources predict the FTSE 100 will open up 54 points from yesterday's close of 5,410.

Stocks to watch

GKN, the automotive, aerospace and land systems engineer, said that total sales rose 11% to £1.483bn in a seasonally weaker third quarter, however pre-tax profits increased by just 1% to £89m, held back by a £11m one-off charge relating to the temporary closure of the Gallatin plant in the US. The trading margin - after accounting for Gallatin - fell from 7.5% to 6.9%.

Satellite broadcaster British Sky Broadcasting (BSkyB) said that revenues grew by 9% to £1.66bn in the first quarter while recording double digit growth in operating profit, earnings per share and free cash flow. The adjusted operating margin rose by 110 basis points from 16.7% to 17.8%, the highest first quarter level for six years. "In tough market conditions, our move to more broadly based growth and multiple products is serving us well," said chief executive Jeremy Darroch.

Drinks giant SABMiller said that lager volumes in the first half were 3% ahead of last year, as strong growth in Latin America and Africa was met with persisting weakness in North America and Europe. "Growth slowed in the second quarter, in part reflecting stronger prior year comparatives, and some particularly poor weather in Europe and China in the current period," the firm said. SABMiller also said that rising raw material costs, along with higher central costs, constrained margins.

In the Press

Companies are cutting their business with the taxpayer-owned lenders Royal Bank of Scotland and Lloyds amid fears that the cost of borrowing will rise after the recent ratings downgrade by Moody’s. The Association of Corporate Treasurers told MPs yesterday that corporate borrowers had already begun talking to rival overseas loan providers, including Japanese banks keen to secure a stronger foothold among British businesses, the Times reports.

Britain is at risk from a fundamental crisis in the world economy and “time is running out” to solve it, the Governor of the Bank of England has said. Despite record low interest rates, printing new money and other emergency measures, governments had not yet addressed the underlying problem of overspending that was at the root of the financial crisis, Sir Mervyn King warned, according to the Daily Telegraph.

Those in need of spare cash amid troubled economic times could do worse than apply for a new prize set up by Lord Wolfson, who is offering £250,000 to the person who comes up with the best plan for winding up the euro in an orderly way. The Wolfson Economics Prize, launched today, will be the second largest cash prize to an academic economist after the Nobel Prize, the Financial Times says.

Newspaper tips

UBM was a pure media business, but the printed word is of decreasing importance, magazines comprising only 12% of revenues and not quite 4% of profits, and most remaining titles have some synergistic link to events. This means less reliance on fickle advertising and more on more robust earnings from events. The shares sell on less than nine times this year’s earnings and offer the support of a 5.5% dividend yield. A strong hold unless you take a very negative view of the global economy, says the Times.

Xstrata’s third-quarter production report came out on a day when the mining sector was suffering one of its periodic bouts of weakness, the market having been spooked by some lower Chinese GNP figures. This seems a little perverse, as big mining projects span decades, but that is how the market works. The world’s fifth-largest miner has lost 40% of its share price since its peak in April as the commodities boom came off the boil. At 5½ times’ this year’s earnings, the shares look like good value for the sector, says the Times.

Interserve, the support services, maintenance and building group, has felt comfortable with reiterating its pledge to double earnings over five years. It's working in the right places and the right sectors (such as energy) that will help cushion it from the turbulence in this part of the world. The shares remain distinctly under-valued at 6.6 times forecast full-year earnings while yielding 6.2%, a yield which doesn't look under any threat, not least because payments to fill a hole in the pension scheme are predicted to fall quite sharply. Buy, says the Independent.

US close

The S&P 500 index rose to its highest level since August as reports that France and Germany have reached agreement on beefing up the Eurozone bail-out fund to €2trn.

The Guardian newspaper reported that European Union diplomats said the agreement on expanding the European Financial Stability Fund (EFSF) would form part of a "comprehensive plan" to resolve the sovereign debt crisis that is threatening economic stability, not just in the Eurozone, but the world over.

The news sent the S&P 500 surging 25 points to 1,225, while the Dow-Jones industrial average racked up a triple digit gain, advancing 180 points to 11,577. The tech-heavy NASDAQ Composite rose 43 points to 2,657.

The better than expected reading today on activity in the housing sector also boosted sentiment, as did strong results from the Bank of America.

Third quarter net income from Bank of America totalled $6.2bn, equivalent to 56 cents a share, versus a loss of $7.3bn (-77 cents a share) in the corresponding quarter of last year. This time round the figures were boosted by $9.8bn of exceptional credits.

Adjusted revenue advanced to $28.7bn from $27bn the year before.

In after hours trading, stock market darling Apple for once disappointed the market with figures that came in below expectations. The iPhone maker's third quarter earnings of $6.62bn were more than half as much again as the $4.31bn made in the corresponding quarter of last year, but that was not enough to satisfy a market that was looking for earnings of $7.25bn. Sales also came in below expectations at $28.27bn, versus market consensus of $29.4bn.

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