US earnings season continues to disappoint but chipmaker Arm beats forecasts again
Leading shares slumped again on increasing worries about economic growth, after a number of poor US corporate updates and further fears about the eurozone.
The FTSE 100 closed 85 points lower at 5797.91, a 1.44% decline, after 3M, Dupont, UPS and United Technologies all added to recent disappointing figures from Microsoft and Google, sending Wall Street sharply lower by the time London closed.
On top of that, Greece appeared no closer to resolving its budget deficit, a necessary step for its next bailout paymant, while Spain was hit by a downgrade of a number of its regions by Moody's. Ishaq Siddiqi at ETX Capital said:
The prominent theme emerging from the third quarter earnings so far, particularly for industrials, materials and resource sectors, is that the slowdown in the global economy, notably China, is eating away at the bottom line for major corporates in developed countries.
We have Facebook after the US close and again, markets are expecting an underwhelming release given that we still don't know how Facebook will monetize itself – reassurance by management will be needed to restore any confidence for Facebook, but perhaps markets are comfortable with weak numbers as the optimism around the company has faded sharply since the launch of its overpriced IPO before the summer.
One technology company to do well however was Arm, the UK chip designer. Its shares climbed 45.5p to 640p after better than expected results. Julian Yates at Investec said:
The 2012 outlook is in line with consensus but we would see modest upside risk. We see Arm as the stand-out tech play, and maintain our buy rating.
The only other gainer in the leading index was Experian, the credit information business, up 40p to £10.87 after it paid $1.5bn to take its stake in Brazilian business Serasa from 70% to 99.6%. The move comes five years after the company first bought into Serasa, and will be funded from existing bank loans. Robin Speakman at Shore Capital said:
This sum is a degree higher than we had anticipated, we had thought it would be closer to $1.2bn. But we note the continued strong performance of the business throughout the current year and its strong future prospects. The statement from Experian suggests that the transaction will be earnings enhancing for the current year to March 2013 and thereafter. With the rise in importance of data services to the global economy, and strong growth prospects in the developing world, we retain a buy stance on Experian.
With investors in a risk-off mood, and commodity prices lower on worries about a slowdown in Chinese growth, mining shares were among the biggest fallers. Kazakhmys closed 35p lower at 721.5p while Antofagasta fell 44p to £12.65.
A downturn in China was also blamed for a profit warning from luxury goods group Mulberry, down 314p to £10.06. Larger rival Burberry was hit by the Mulberry news, losing 38p to £11.34.
Lower down the market defence group Chemring - which makes flares and explosives - dropped 31.4p to 314.9p after it parted company with its chief executive, in the middle of a bid situation. US private equity group Carlyle has until 9 November to decide whether to make a formal offer, and analysts said a change at the top at Chemring could make a deal less likely. Guy Brown at Oriel Securities was less certain:
The move potentially flags that the deal is collapsing. It would appear odd to appoint a new chief executive with the belief the group is going to be taken over within a matter of weeks.
Trinity Mirror lost more than 10%, down 7.25p at 64.5p after the news that the Daily Mirror publisher was being sued over alleged phone hacking, the first move for damages against a company other than Rupert Murdoch's News Corporation. Analyst Johnathan Barrett at N+1 Singer said:
The shares have been very strong and buoyed by an improved nationals advertising market and the likelihood of greater cost savings in 2013. The shares moved slightly above our target price yesterday although we note that on the expectation of a full 3p dividend or more there is still a small positive upside on a total return basis. The claims will weigh on the shares, in part because many had assumed the subject was fading away as an issue.
Elsewhere Irish drinks group C&C added 1.5% to €3.82 after buying US cider business Vermont for $305m. The move takes the company into the fast growing US market for ciders, and should help offset weakness in the UK. Sales of C&C's Magners brand fell 17% in the first half following the wet summer, but grew by 16% in the US. Vermont is the maker of Woodchuck, the largest domestic cider brand in the country.
C&C also reported a 2% decline in revenues in the six months to the end of August, and a 2.7% fall in operating profits to €65.6m. Analyst Wayne Brown at Canaccord Genuity issued a sell note, saying the company's core UK business was weakening, and it had paid too much for Vemont:
Whilst we appreciate the need to diversify away from the UK and republic of Ireland, the cost of doing this, is too high in our view. Our first glance suggests that not only is 20.8 times EBITDA too high, but the acquired business is going to require an increase in capital expenditure of $30m, and marketing costs are likely to rise from 2% of sales to a more normalised 10% as competition rises in the US. On the basis that the EBITDA contribution should be around $15m, this is offset by $2m-$3m of depreciation and around $8m of interest expense.
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