Stocks to watch in February
February sees an avalanche of annual profits bulletins from companies with calendar year ends. This includes 29 of the top 100 companies making up the FTSE 100 index.
Many of them will be producing dramatic profit recoveries for 2010, but some of these are likely to be cautious about the outlook for the current year.
AFRICAN BARRICK GOLD
Afrcian Barrick Gold has had a remarkable first year as a listed company.
Spun off as a seperate quote by the world's largest gold producer, Canada-based Barrick Gold, it quickly found itself established as a FTSE 100 member with a market value of more than £2 billion.
The company, still 74% owned by its giant parent, concentrates on gold mining in Tanzania where the lions's share of 700,000 ounces of annual production comes from its Bulyanhulu mine.
It has three other working mines and a fourth coming on stream after the recent acquisition of Tusker Gold.
With its parent standing ready to finance further exploration and acquisition, the long-term prospects of the company look fair. It already has reserves of 16.8 million ounces - enough to keep recent production levels going for 20 years.
The only fly in the ointment could be a shake out in the gold price - currently $1,350 an ounce but still way above the group's estimated cost of mining at $529 an ounce. Profits - expected to reach £120.7 million in 2010 - are forecast to increase another 50% in the current yearby analysts, four of whom rate the shares a 'strong buy'.
One of the more spectacular results is expected to come from ARM, the leading designer of microchips for a range of electronic products, including the Apple iPad. After nine months, profits were up 86% and the full-year forecast is for returns of £150 million against £47.25 million last time.
The shares, hovering around 400p, are about the highest they have been since the dotcom bubble burst nearly 10 years ago. Some analysts think the company can raise earnings by around 25% in the current year, pushing the price/earnings ratio down from a sky-high 47.2 to 34.7.
Despite now being one of Britain's best technology companies, it is quite hard to convince analysts that the shares are worth holding. Of 22 brokers who follow the stock, six rate them an outright sale and another six think they will underperform. Only one lonely figure rates them a strong buy.
In the same area of microchip design, the much smaller Wolfson Microelectronics makes an intriguing contrast. Apple punished the company by dumping it from its list of suppliers in 2009 when Wolfson failed to deliver on time.
Now the company is back in the Apple fold for the iPad, as well as making products for eBooks, DVDs, mobiles and gaming devices.
Third-quarter figures announced in November were disappointing, with hopes of a return to profits in 2010 being dashed. Now the forecast is for losses of £1.23 million, compared with a loss of £9.16 million in 2009.
Before it hit trouble, the group had been profitable and earned over £30 million pre-tax in 2006. Now the hope is that profitability will return this year with the market expecting profits of around £12.5 million.
Pundits are divided over the shares with four brokers giving a 'strong buy' recommendation, while two others are urging 'strong sell'. The shares have already more than doubled in anticipation of a return to profits.
Shares in XP Power have risen almost tenfold in the past couple of years and now change hands at around £10. Despite this meteoric rise, the whole business is still only a tiddler in stockmarket terms with a market value of just under £200 million.
The business has been built by providing expertise on power supply to makers of electronic products in the communications, defence, industrial and medical world.
From a rapidly expending manufacturing base in Shanghai, the group is now pumping out an ever-widening range of products and finds its blue-chip customers want more and more. Low-energy products are a speciality. Revenues in the third quarter were up by 52% on the same period last year.
Determined to maintain it's growth momentum, the group is setting up a new manufacturing unit in Vietnam where labour costs are even lower than in China.
Profits for 2010 are expected to jump from £8.4 million to £15.6 million. Another 15-20% rise in profits looks on the cards for the current year. Both the brokers who follow the company say the shares are still a 'strong buy'.
Avis Europe has the merit of being a relatively small company (market capitalisation £391 million) but with a very big brand name - second only to Hertz in the world of car hire. The company is also 60% owned by the big Belgian car dealer D'leteren.
This undoubtedly helped the company raise the necessesary fund to re-finance the business, which plunged into losses during the recession.
Two years ago, with the shares changing hands at 3.5p, the market was signalling the worst. But the market was wrong. A patchy recovery in car hire (good in Germany, not so good in Spain) is underway on a much lower cost base.
The result has been a phenomenal performance by the shares. In the past year alone, they have emerged phoenix-like from 'penny share' status at 18.5p to 200p.
Like XP Power, they must be one of the best performing shares of 2010. Profits of £43.3 million compared with just under £4 million are forecast for the year just ended and further modest growth is expected this year.
For any company dealing in what can only be described as fripperies, 4imprint Group has done awfully well by its shareholders.
Its niche market is the promotional pens, mugs, mouse mats and other giveaways that clutter the marketing departments of most businesses. 4imprint has amassed more than 100,000 customers worldwide thanks to these trinkets.
By avoiding direct manufacture and just designing and distributing, the business has thrived and since 2006 dividends have grown steadily from 9.5p to a forecast 13.6p for 2010.
Profits for the year just ended are expected to climb from £2.67 million to £9.56 million, with a further 10 to 15% rise in earnings forecast for the coming year.
A willingness to take on big risks - from hurricanes and earthquakes to BP's ill-fated oil rig in the Gulf of Mexico - explains why shares of leading quoted insurance underwriters sport such fat dividend yields.
These high yields - ranging up to 8% - are not the only reason that non-life insurers attract considerable investor interest in these days of low interest rates. A fair amount of bid activity is also going on.
Brit Insurance, with results due out in late February, is currently the subject of a bid from Apollo Global, a private equity firm. Meanwhile Beazley - with results due on 9 February - is making a play for smaller rival Hardy with an offer worth 300p a share.
Other companies in this sector reporting in February include Catlin, Lancashire Holdings and RSA Insurance. Beazley and RSA look the pick of the bunch, with Beazley in particular showing a solid track record. Profits for 2010 are expected to rise from £100.7 million to £151.8 million and could be as high as £178 million, according to one analyst's forecast.
The shares at 110.4p are on a prospective yield of 6.8%. Over the past five years dividends have grown by more than 50%. The shares look attractive whether Beazley wins control of Hardy or not. According to one broker net asset backing for the shares could rise to 152p this year.
This article was originally published in Money Observer - Moneywise's sister publication - in January 2011.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
A way of valuing a company by the total value of its issued shares and calculated by multiplying the number of shares in issues by the market price. This means the market capitalisation fluctuates continually as the value of the shares change in the market. For example, HSBC has 17.82bn shares in issue at a price of 646.2p making a market capitalisation of £115.15bn.