Morningstar's View on Major Company Earnings and M&A

Heavyweight oil sector, pharmaceuticals and telecoms companies all reported earnings or takeover deals this week; we explain what the news means for investors

Holly Cook 6 February, 2015 | 12:59PM
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Holly Cook: It’s been a very busy week on the UK market with earnings releases from major companies across the UK. We're going to take a very quick look at some of the key sectors that reported this week. That's the pharmaceuticals sector, the energy sector and the communications sector.

So, starting off with pharmaceuticals, AstraZeneca shares suffered after annoucning a 28% drop in earnings due to higher marketing costs. Morningstar expects the largely flat top-line growth seen in the fourth quarter to reflect the firm’s growth prospects over the next three years.

Trading at £46, much higher than our £34 FVE, the stock carries just one star, indicating we thinks it’s overvalued.

GlaxoSmithKline’s results were largely in line with our estimates.

On the plus side, we like that it’s enjoying strength in its portfolio of branded drugs and it’s becoming more competitive in the vaccine and consumer health businesses.

But on the downside, not only is the pricing environment deteriorating for its key respiratory franchise, but we’re concerned that any slip ups in its vaccine or consumer health businesses would probably lead to a dividend cut.

Trading just below our 1,510p, we think the stock is broadly fairly valued and so it carries a 3-star rating.

In the energy sector, the main news from BP was its decision to slash its capital budget to $20 billion this year in a move to prepare for oil prices remaining low throughout 2015 and beyond.

Morningstar believes that, quite frankly, 2015 is going to be a bit of a shocker for BP, but its relatively strong financial position means its dividend is safe, in our view, and its legal issues are manageable. 

The shares are trading around a pound below our £5.75 fair value estimate, and so carry a 4-star rating.

BG also cut its capital budget to $6-7 billion, while its earnings came in broadly in line with our expectations, including operating profit down 36% partly due to lower commodity prices.

Management guidance was a touch on the weak side, but our analysts believe management may be erring on the side of caution having previously disappointed the market by failing to meet its own guidance.

With shares worth less than £10, versus our valuation of £14, this is one of the few stocks on the UK market that has a 5-star rating from Morningstar as we believe it is significantly undervalued.

In the communications and telecoms sector, earnings news as well as M&A has dominated the week.

Sky’s first-half results showed impressive subscriber growth, with strong growth in the UK and Ireland in particular, and Germany, Austria and Italy.

Morningstar doesn’t expect subscriber growth to remain this strong, but we think Sky can continue to expand its base regardless of what BT or other competitors continue to try to harm it.

Shares responded well to the results, confirming our view that they’re slightly overvalued compared to our valuation of £8.80.

BT was the best performer on the FTSE 100 on Thursday after confirming the details of its deal to buy mobile network EE for £12.5bn in cash and shares.

We think the deal makes a lot of strategic sense, and though we expect it to take about a year to get regulatory approval, we do expect the deal to go through.

A steep rise on the news took the share price well above our £3.17 fair value estimate but we still think that’s what the shares are worth.

Last but not least, Vodafone shares fell 2% after reporting third-quarter sales that leave the firm a bit behind the trajectory needed to meet our expectations for the full year, but the trends are moving in the right direction.

The share price drop this week brought it closer to our £2.18 valuation, but we still think it’s a touch overvalued.

That’s a quick look at the main market-moving news this week. For more news and Morningstar analyst reaction, check out Morningstar.co.uk.

Thanks for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
AstraZeneca PLC12,510.00 GBX0.95Rating
BP PLC460.00 GBX0.00Rating
BT Group PLC139.55 GBX3.37Rating
GSK PLC1,604.50 GBX-0.34Rating
Vodafone Group PLC68.96 GBX0.38Rating

About Author

Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites

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