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FTSE heads to new high as pound slumps, with Pearon leading the way

Discussion in 'Market News' started by Lily, Oct 4, 2016.

  1. Lily

    Lily Forum Member

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    Leading shares jump past 7000 barrier after weaker sterling boosts exporters

    Leading shares have broken through the 7000 barrier for the first time since May 2015 as a plunge in the pound to a new 31 year low boosts the exporter-heavy FTSE 100.

    Banking shares are also receiving some support from a revival in Deutsche Bank. After a market holiday in Germany on Monday, the bank’s shares have reopened up 2.55% on hopes that it will not have to pay as much as the $14bn demanded by the US Department of Justice in fines related to mortgage mis-selling.

    Down 25% from its highs and with an around 10% 2018 free cashflow yield versus a PE of 10 times the market is expecting another profits warning. We don’t think Pearson will warn, meaning the shares could recover sharply on the third quarter results.

    (i) Pearson cut market expectations by £35m-£75m pre restructuring (and £355m-£395m post restructuring) in January. This covers a multitude of sins.

    (ii) Pearson’s EBITA forecasts have a lot of flex allowing, for instance, an increase of £110m in incentive compensation in 2016 – 18% of expected EBITA.

    Our analysis of margin levers provides a strong case for profit growth faster than revenues, while strong free cashflow allows us to now formally model M&A. We upgrade 2017 earnings per share by 10% of which 6% is underlying. Growth and margins in the main division - Products - look well supported by secular drivers. Double upgrade to buy.

    It seems that it is going to be hard to provide a tourniquet for sterling’s recent wounds given the solidity of the newly announced Brexit timeline (with March set to go down in the history books as when Article 50 was triggered), and the firmness with which May stated her intention to chase border control even if it means relinquishing Britain’s position in the single market.

    There’s quite a big chunk of globally diverse companies in that group [the FTSE 250] as well, and an agreed takeover bid for one of its constituents has helped... For foreign investors who are looking at sterling-denominated assets, they are continuing to get a bit cheaper.

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