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US Fed’s FOMC meeting today; all eyes on QE3 clues

Newsletter Update Wednesday, 25th April 2012

FTSE-100


Graph - 250412

Source: Bloomberg

FTSE-100 statistics


Yesterday: +0.8%
Latest: 5,709.5
High: 5,714.2
Low: 5,658.5
Top three: Man Group +4.8%

Aviva +4.2%

Intl Consol Air  +3.6%

Bottom three: Capita Group -6.4%

ARM Holdings  -6.2%

Br. Amer. Tobacco -1.8%

Source: Bloomberg

Analyst


Donald Linderyd

(t) +44 (0) 207 382 8421

(e) donald.linderyd@hbmarkets.com


Quick Links:

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The Markets

Market opening: Markets could open higher today, taking cues from the US and Asia, where most indices closed with gains. FTSE futures, trading 5.5 points up at 7:00am, concur. GDP data to be released later today could guide markets further.

_

New York: Wall Street continues to trend higher due to strong results this earnings season. Better than expected earnings from Apple and other manufacturers like 3M helped the S&P 500 index to close 0.4% higher yesterday.

Asia: Markets were trading higher on solid US corporate results and expectations that Bank of Japan would ease the monetary policy later this week. After four days of consecutive losses, the Nikkei closed 1.0% higher today. Meanwhile, the Hang Seng was trading 0.1% down at 7:00 am today.

Continental Europe: Relatively successful auctions of Dutch, Italian and Spanish bonds soothed anxious investors and helped markets reverse Monday’s losses. However, trading volumes remained thin, indicating the sentiment is subdued. The German DAX and the French CAC 40 gained 1.0% and 2.3%, respectively.

UK small caps: The FTSE AIM All-Share index closed flat yesterday. To read our latest small cap research, click here.

 

Today’s breakfast menu:

- HB Markets on ARM Holdings – Buy; Associated British Foods – Hold; Reed Elsevier – Buy; BBA Aviation, Carpetright and Filtrona

- US consumer confidence; US new home sales; US house price index; and US Richmond Fed manufacturing index

Today’s news

US Fed’s FOMC meeting today; all eyes on QE3 clues

The US Federal Reserve will hold its monthly policy meeting today. The Fed’s stance on the economy is expected to be slightly more optimistic, but any revision in interest rates seems unlikely. However, the Federal Open Market Committee (FOMC) meeting will be closely watched for indication on further QE in the near future.

UK to reveal Q1 2012 GDP figures today

The UK is set to reveal its GDP figures today. The country would discover if it has slipped into a technical recession (two consecutive quarters of contraction) after having contracted 0.3% in Q4 2011.


Read the latest AIM Update now!

Company News

UK companies reporting today

 

Mkt. Cap.

(£)

Ticker

Sector

Period

Expected
sales (£)

Expected
EPS (p)

DS Smith

1.6bn

SMDS.L

Basic mats.

Trading update

-

-

Talvivaara Mining Co.

521.2m

TALV.L

Mining

Q1 2012

54.0m

-

Sports Direct International

1.7bn

SPD.L

Retail

Trading update

-

-

Fenner

848.8m

FENR.L

Basic mats.

H1 2012

-

17.0

UBM

1.5bn

UBM.L

Advertising

Q1 2012

-

-

GlaxoSmithKline

72.2

GSK.L

Healthcare

Q1 2012

6.8bn

29.12

Standard Life

5.2bn

SL.L

Insurance

Q1 2012

-

-

 Polymetal Intl

3.8bn

POLY.L

Mining

FY2012

870.8m

69.81

Capital Shopping Centres

2.8bn

CSCG.L

Property

Q1 2012

-

-

Johnston Press

36.8m

JPR.L

Media

FY2011

-

-

Premier Foods

401.7m

PFD.L

Food

Q1 2012

-

-

Stagecoach

1.5bn

SGC.L

Transport

Trading update

-

-

Bodycote

794.4m

BOY.L

Industrials

Trading update

-

-

Sources: Bloomberg, Reuters, Standard & Poor’s EMS Marketscope, Consensus forecasts

ARM Holdings (ARM.L, 531.5p) – Buy

ARM holdings announced Q1 2012 earnings yesterday. Revenue grew 14.2% to £132.5m as shipment of chips in consumer and embedded digital devices jumped 15% y-o-y. The company shipped 1.1bn chips to be used in mobile phones and tablets, similar to that in Q1 2011. Licensing revenue, which constitutes 37% of group revenue, increased 20.6% y-o-y to £48.5m. Underlying pre-tax profit rose 22% to £61.9m as operating margin improved to 44.5% from 42.5% in Q1 2011. Net profit rose 74% to £37.4m. EPS increased to 2.7p from 1.6p in Q1 2011. During the period, ARM signed 22 processor agreements. The management was confident about meeting full year expectations.

Our view: We believe the markets have overemphasised rival Intel’s mobile phone design wins and the lack of ARM chips in, yet to be released, Windows 8 PCs and tablets. The q-o-q drop in shipments of chips has clouded matters further. Nonetheless, the management expects the industry to improve in H2 2012 and see an increase in demand for ARM’s chips, which are smarter and more power efficient. The recent joint venture with Europe-based Gemalto and Giesecke & Devrient, to create devices with enhanced security for executing online transactions, is also likely to spur growth. This should help preserve ARM’s long-term growth prospects.

Associated British Foods (ABF.L, 1,239p) – Hold

Associated British Foods released results for 24 weeks ended 3rd March 2012 yesterday. Pre-tax profit rose 3% to £329m following an 11% jump in revenue to £5.8bn. Revenue from sugar increased 17% to £1.2bn supported strong sugar sales in the UK and favourable regional pricing. Primark revenue increased 15% to £1.6bn spurred by new store openings; like-for-like sales grew 2%. Grocery revenue increased 4% to £1.8bn. Operating profit was up 6% to £378m. The 59% jump in operating profit from sugar to £172m helped offset the decline in grocery operating profit to £75m from £109m in H1 2011 (ascribed to the restructuring costs at Australia’s George Weston Foods and Allied Bakeries in the UK). Operating profit at Primark improved marginally to £154m from £151m in Q1 2011 as the company decided against passing on high cotton prices to customers. EPS increased 3.6% to 31.7p and interim dividend was up 8% y-o-y to 8.5p.

Our view: AB Foods impressive top-line growth masks the pressure on operating margin. High input prices at Primark and restructuring costs at the grocery division continue to impact overall profitability. Nonetheless, the management expects lower cotton price and space additions to accelerate growth at Primark in FY2012. The efforts to streamline the grocery operations should also pay off. However, at the current valuation we believe the market has priced in most or the positives and we see little potential for further price outperformance.

Reed Elsevier (REL.L, 526p) – Buy

Reed Elsevier issued a trading statement for Q1 2012 yesterday. Underlying growth in Q1 2012 followed the trend set in FY2011. At the Elsevier division, subscription renewals progressed well. In FY2012, the management expects growth in research volumes and the growing demand for electronics to drive moderate underlying growth in revenue and profit. The performance of LexisNexis risk solutions is expected to be mixed, with the insurance and business services expected to grow while the outlook for screening services remains uncertain. In Q1 2012, LexisNexis Legal & Professional saw marginal improvement in underlying revenue. However, the management said, difficult market conditions have limited the scope for enhancement of margins and revenue. Reed Exhibitions completed the buyout of a joint venture in Brazil and made bolt on acquisition in China and in the alternative energy sector. The division reported good growth in annual events in Q1 2012 and expects this to continue through FY2012. H1 2012 will also see the positive impact of biennial cycling. Revenue at the Reed business information division was impacted by the disposal of Total Jobs. Further restructuring plans include the divestment of the Australian magazine and marketing operations and disposal of Variety, the US-based entertainment focused publication. The growth in data services is expected to offset the slump in print advertising. In FY2012, the management expects further underlying growth in revenue and profitability.

Our view: Contrary to the markets opinion of the stock having consumer-staples-like qualities, we see Reed Elsevier as a relatively defensive media stock with a highly diversified portfolio. We like the shift in the management strategy to increase exposure to digital media. The restructuring of the business information unit is expected to enhance underlying growth and profitability. Expansion into emerging markets of China and Brazil should drive growth. Maintaining our long-term view on the stock, we reiterate our buy rating.

BBA Aviation (BBA.L, 194p)

Yesterday, BBA said Q1 2012 revenue grew 2% but declined 1% after adjusting for fuel prices. Revenue from the aftermarket services and systems division increased 15% while that at the flight support arm declined 8% (after adjusting for fuel prices). An unusually warm winter in North America limited growth in de-icing revenue against strong comparables in Q1 2011. The management expects the muted growth in North American and European air traffic seen in Q1 2012 to continue in Q2 2012. In FY2012, they anticipate growth at major markets to be low and volatile.

Carpetright (CPR.L, 598p)

Carpetright issued a profit warning yesterday after total sales declined 4.2% in the 11 weeks ended 14th April 2012. Total sales in the UK decreased 3.2% but were up 1.4% on a like-for-like (LFL) basis. Performance in the UK was impacted by below forecast sale of the bed range launched in early 2012. In Europe, sales were down 4.7% and LFL sales declined 4.4%. After accounting for adverse currency movements, sales in Europe slumped 8.0%. The management said weak consumer confidence in the Netherlands and Belgium was affecting the floor coverings markets. Consequently, they expect underlying pre-tax profit to be in the range of £3m-£4m.

Filtrona (FLTR.L, 463.2p)

In an interim statement issued yesterday, Filtrona said revenue rose 22% y-o-y on a constant currency basis. Like-for-like (LFL) revenue increased 8%. Revenue at the protection & finishing products division soared 63% y-o-y helped by last year’s acquisition of Reid Supply Company and Richco. Revenue at the division grew 14% on a LFL basis. The porous technologies, coated & security products and the filter products division grew 3%, 5% and 7%, respectively. The company completed the £6m acquisition of Securit World in February. The acquisition of the South Korea-based Jae Yong Co, for an undisclosed amount, was completed yesterday and is expected to be earnings accretive. The management said that the integration of all the acquired businesses was progressing well and the company remained on track to achieve the Vision 2015 target of mid-single digit LFL revenue growth and double digit adjusted EPS growth.


Make use of your 2012/2013 ISA Allowance now! Why wait?

Economic News

Economic releases due today

Region

Release

Indicator

Period

Previous

Expected

UK GDP q-o-q % Q1 2012 -0.3 0.1
UK GDP y-o-y % Q1 2012 0.5 0.3
UK CBI Trends Total Orders Index April -8.0 -6.0
UK CBI Trends Selling Prices Index April 24.0 26.0
UK CBI Business Optimism Index April -25.0 -18.0
US MBA Mortgage Applications w-o-w % 20th April 6.9 -
US Durable Goods Orders m-o-m % March 2.4 -1.7
US Durables Ex Transportation m-o-m % March 1.8 0.5
US Cap Goods Orders Non-def Ex Air m-o-m % March 1.2 1.0
US Cap Goods Ship Non-def Ex Air m-o-m % March 1.4 1.4
US FOMC Rate Decision % 25th April 0.25 0.25

Sources: Bloomberg, Reuters, Standard & Poor’s EMS Marketscope, Consensus forecasts

US consumer confidence

Consumer confidence in the US slipped to 69.2 in April from 69.5 in March, the Conference Board reported yesterday. The present situation index increased to 51.4, the highest level since September 2008. However, the forward looking expectations index, which measures expectations for the next six months, dipped to 81.1 from 82.5 the previous month.

Our view: Consumer confidence shrank contrary to economists’ expectations that it would rise to 69.7. Consumer confidence is seen as the forward indicator of consumer spending, which is vital for the economy. Consumer confidence may have been hurt by last month’s employment report showing that job additions had slowed, and the fact that cost of fuel had risen without a corresponding increase in wages.

US new home sales

Sales of new homes declined 7.1% m-o-m to a seasonally-adjusted annual rate of 328,000 in March, following a sharp upwardly revised 7.3% m-o-m increase in February, the Commerce Department said yesterday. On an annual basis, new home sales advanced 7.5% y-o-y and Q1 2012 sales increased 16% after jumping 45% in Q4 2011. The inventory of unsold homes fell 144,000, the lowest since recordkeeping began in 1963. The median prices of new homes sold declined 1.0% m-o-m to US$234,500 in March.

Our view: Despite the drop in sales, new home sales were better than what economists had anticipated. Sales increased to 318,000 compared to the 313,000 reported previously in February. The availability of foreclosed houses (generally offered at deep discounts) resulted in oversupply, which pushes prices down and hampers recovery in the housing market. A weak housing market has so far dragged the US recovery and is also likely to influence the Fed’s FOMC meeting scheduled today.

US house price index and S&P/Case-Shiller house price index

The Federal Housing Finance Agency (FHFA)’s house price index gained 0.4% y-o-y in February, the first annual gain since July 2007. However, the S&P/Case-Shiller home-price index showed a sixth straight decline as house prices decreased in 16 of the 20 cities it monitors. Nonetheless, the index shed just 3.5% y-o-y, the smallest annual fall so far, indicating the drop in house prices has decelerated.

Our view: Rising foreclosures are deadweight on the US housing market. The abundant supply of cheap foreclosed property continues to pressure prices. However, the FHFA’s index, which registered the first annual increase in five years, and deceleration of the S&P/Case-Shiller index decline suggests the housing market could be stabilising.

US Richmond Fed manufacturing survey

The Richmond Fed manufacturing index doubled to 14 in April from 7 in March, beating economists’ estimate that the index would slip further to 6. The sub-index of shipments added 2 points over the previous month to settle at 18. The index for new orders jumped to 13 from 11 in March. The employment sub-index gained 4 points to 10 in April. The business outlook was more or less confident as the index of expected shipments increased to 28. However, the index for new order expectations declined to 29 from 32 the previous month.

Later this week…

Companies
reporting

 

Mkt. Cap. (£)

Ticker

Sector

Period

Expected sales (£)

Expected EPS (p)

Thursday 26th April

 

 

Elementis

898.6m

ELM.L

Basic mats

Q1 2012

-

-

Senior

824.7m

SNR.L

Aero & def.

Q1 2012

-

-

Cobham

2.6bn

COB.L

Aero & def.

Q1 2012

-

-

Go-Ahead Group

489.7m

GOG.L

Transport

Q3 2012

-

-

Howden Joinery Group

760.1m

HWDN.L

Retail

Q1 2012

-

-

Unilever

97.3bn

ULVR.L

Cons. goods

Q1 2012

12.1bn

-

Barclays

26.0bn

BARC.L

Financials

Q1 2012

7.9m

12.05

Royal Dutch Shell

137.8bn

RDSA.L

Oil & gas

Q1 2012

US$98.3bn

US$1.10

AstraZeneca

35.6bn

AZN.L

Healthcare

Q1 2012

US$7.8bn

US$1.78

Shire

11.3bn

SHP.L

Healthcare

Q1 2012

719.1m

0.315

Admiral Group

3.3bn

ADM.L

Insurance

Q1 2012

-

-

Whitbread

3.3bn

WTB.L

Restaurants

FY2012

1.8bn

131.16

British American Tobacco

62.6bn

BATS.L

Tobacco

Q1 2012

-

-

Meggitt

3.1bn

MGGT.L

Aero & def

Q1 2012

-

-

Kazakhmys

4.5bn

KAZ.L

Mining

Q1 2012

-

-

Segro

1.7bn

SGRO.L

Property

Q1 2012

-

-

ASOS

1.2bn

ASC.L

Comm. servs.

Trading update

-

-

Taylor Wimpey

1.6bn

TW.L

Homebuilding

Trading update

-

-

McBride

232.4m

MCB.L

Cons. staples

Q3 2012

-

-

Jardine Lloyd Thompson

1.5bn

JLT.L

Financials

Trading update

-

-

Croda

3.1bn

CRDA.L

Basic mats.

Q1 2012

-

-

Friday 27th April

 

 

AZ Electronic Materials SA

1.2bn

AZEM.L

Basic mats

Q1 2012

-

-

Aegis Group

2.1bn

AGS.L

Advertising

Q1 2012

-

-

WPP

6.7bn

WPP.L

Advertising

Q1 2012

-

-

Pearson

9.2bn

PSON.L

Media

Q1 2012

-

-

Ultra Electronics

1.2bn

ULE.L

Aero & def.

Trading update

-

-

Colt Group SA

869.9m

COLT.L

Comm. servs.

Q1 2012

-

-

Sources: Bloomberg, Reuters, Standard & Poor’s EMS Marketscope, Consensus forecasts

Economic
releases

Region

Release

Indicator

Period

Previous

Expected

Thursday 26th April      
UK BBA Loans for House Purchase Loans March 33,103.0 34,000.0
UK CBI Reported Sales y-o-y % April 0.0 -4.0
UK Nationwide House prices SA m-o-m % April -1.0 0.5
UK Nationwide House prices NSA y-o-y % April -0.9 -0.3
UK Nationwide Consumer Confidence Index March 44.0 43.0
Eurozone Business Climate Indicator Index April -0.3 -0.3
Eurozone Consumer Confidence Index April -19.8 -19.8
Eurozone Economic Confidence Index April 94.4 94.2
Eurozone Industrial Confidence Index April -7.2 -7.0
Eurozone Services Confidence Index April -0.3 -0.5
Germany Consumer Price Index m-o-m % April 0.3 0.1
Germany Consumer Price Index m-o-m % April 2.1 2.0
Germany CPI – EU Harmonised m-o-m % April 0.4 0.1
Germany CPI – EU Harmonised y-o-y % April 2.3 2.2
US Chicago Fed National Activity Index Index March -0.09 -
US Initial Jobless Claims Thousands 21st April 386.0 375.0
US Continuing Claims Thousands 14th April 3,297.0 3,293.0
US Bloomberg Consumer Comfort Index 22nd April -31.4 -
US Pending Home Sales m-o-m % March -0.5 1.0
US Pending Home Sales y-o-y % March 13.9 7.3
US Kansas City Fed Mfg Activity Index April 9.0 7.0
Friday 27th April      
UK GfK Consumer Confidence Survey Index April -31.0 -30.0
Germany GfK Consumer Confidence Survey Index May 5.9 5.9
Germany Import Price Index m-o-m % March 1.0 0.9
Germany Import Price Index y-o-y % March 3.5 3.3
US Employment Cost Index Index Q1 2012 0.4 0.5
US GDP q-o-q % Q1 2012 3.0 2.5
US Personal Consumption % Q1 2012 2.1 2.3
US GDP Price Index % Q1 2012 0.9 2.1
US Core PCE q-o-q % Q1 2012 1.3 2.1
US U. of Michigan Confidence Index April 75.7 75.7

Sources: Bloomberg, Reuters, Standard & Poor’s EMS Marketscope, Consensus forecasts


Recommendations

During the three months to end-March 2012, the number of stocks on which HB Markets has published recommendations was 183, and the recommendations were as follows: Buy – 87; Speculative Buy – 2; Hold – 75; Sell – 19.

Full definitions of the recommendations used by HB Markets in its publications and their respective meanings can be found on our website here.

Important Risk Warnings and Disclaimers

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