Investors cautious as Shell sends oil sector lower after cutting investment plansEnergy shares weighed down a market already troubled by the Greek situation and the prospect of a US rate rise in the middle of this year.The slump in the crude price is hitting the spending plans of major oil companies, with Royal Dutch Shell the latest to unveil cutbacks. The company’s B shares slid 110p to £21.38 after it unveiled a $15bn cut in investment over the next three years. Rival BP lost 8.1p to 424.85p and BG dropped 16.9p to 880.9p.A trip to GKN’s UK Driveline facility confirmed the growth that has been seen in UK automotive production in recent years. Sales in the current year should have doubled from the lows of 2009, largely driven by continuing growth of major UK car manufacturers, notably Jaguar Land Rover which now accounts for around 58% of sales and Nissan (around 23% of sales). Weaker sterling and a lower fuel price should help to stimulate both domestic and export demand for manufacturers, although foreign exchange is less favourable in Europe and a few end markets such as Russia are forecast to weaken. Overall Birmingham is expecting around 6% growth in top-line this year for its range of CVJ side shafts and prop shafts. As less than 10% of total divisional sales this is just one of the global growth stories with NAFTA and China expected to continue to provide the ongoing impetus to global car production as well this year, with GKN Driveline expected to continue to outperform due to sales mix and already embedded share increases.Despite the recent rally the shares are trading on only 12 times 2016 consensus earnings per share. Given continued growth in Automotive and a likely increase in Aerospace profits, backed by more favourable foreign exchange, we feel 2015 could see a more positive trend for forecasts. We believe GKN should trade on a 2016 multiple of 12.8 times. We maintain our buy recommendation and target price of 410p.[Wednesday’s] site visit to GKN’s Driveline plant in Birmingham confirmed positive UK auto momentum, highlighted a culture of continuous operational improvement and re-affirmed GKN’s dominant standing with global auto original equipment manufacturers.Diageo has released a weak set of interim results, which were towards the lower end of market expectations. Reported results were heavily impacted by a £268m hit from the weakness of key emerging market currencies against sterling. The underlying performance at constant currencies was resilient, with a solid performance in developed markets and mixed conditions in emerging markets. Outlook comments were cautiously optimistic, with financial performance expected to improve in the second half of the year. We anticipate a small downgrade to our full year earnings per share estimate, but the recommendation is maintained at Accumulate.We expect 2015 earnings per share consensus, which has already dropped 18% since this time last year, to fall further today reflecting the heavier foreign exchange impact.This is perhaps a so-so trading update. Growth is better than it was last full year – against reasonably tough comps – but growth over the whole 17 weeks under review is slower than it had been in the first 8 weeks and, as Christmas was strong, this implies that the rest of December and January to date have not been good.M&B suggests that comparisons will remain tough (there wasn’t much of a winter last year) and says that margins will be down. This is in line with our understanding of what is going on regarding discounting (check vouchercodes.co.uk) but may be perhaps a little disappointing overall.While the shares have shown some recent recovery from depressed levels, the rating is undemanding. The group should generate strong earnings growth, partly as the Orchid transaction becomes increasingly earnings accretive. Accordingly the shares have good medium term upside. Continue reading...
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