Leading shares pull back from attempt at new record as commodity companies move lowerA day after pushing towards a new record high, leading shares have come off the boil.With weak Chinese services data - prompting a cut in the country’s reserve ratio - and another drop in the oil price hitting the commodities sector, the FTSE 100 slipped 11.78 points to 6860.02. Ahead of a meeting between new Greek finance minster Yanis Varoufakis and his German counterpart Wolfgang Schäuble, worries about the prospects for Greece and the eurozone re-emerged, adding to the general jittery feeling. David Madden, market analyst at IG, said:The possibility of another round of the Greek debt crisis and a slide in natural resources stocks is a worrying scenario for markets. The admission by the Greek finance minister that the country is ‘bankrupt’ set the wheels in motion for a day of selling, and the failed attempt by Beijing to spur economic activity by slashing the central banks’ lending requirements cemented it. The mining sector initially jumped on the back of the news from Beijing, but it isn’t nearly enough to coax traders into buying mining stocks and the sector is squarely in the red. Eurozone equities are on edge as Greece is at loggerheads with Frankfurt again, and neither side wants to back down.Based on our channel checks and view that Stryker does not want to be third in the orthopedic market where it competes (behind Zimmer Biomet and Johson & Johnson), we do believe that the company will indeed purchase S&N. By our estimate, S&N would be at least $0.50 accretive (probably closer to $0.75) to Stryker’s 2016 earnings per share (we assume it will take at least nine months to close). From a regulatory perspective, we do ot believe that either the EU or US Federal Trade Commission would challenge the deal or require a meaningful level of divestiture to complete the deal. In light of BT and 3UK entering into exclusive talks to buy EE and O2, respectively, we analyze the potential impact network consolidation could have on Dixons Carphone’s profitability and conclude that investors may be overly pessimistic. We would not dismiss that network consolidation will be a prevailing theme in 2015 but our analysis suggests that at the current share price investors already assign a 50% probability for Carphone UK to be worthless. We understand that Dixons Carphone has signed binding long-term contracts with all network operators at least until 2020 that should support mid-term profitability.The worst case scenario in which all networks abandon Dixons Carphone after 2020 could potentially cost Dixons Carphone £170m of lost earnings before interest and tax or 130p a share on our estimates, but we consider it a tail event distant in the future for which we assign a 10% probability. We do not change our estimates but bring our price target down by 10p to 480p to incorporate this scenario. We reiterate our overweight rating. Continue reading...
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