This week I have taken a closer look at Meggitt, a lesser-known FTSE100 company. The group’s roots can be traced back to the mid-19th century, with innovations such as early aviation instruments for hot air balloons including the world’s first altimeter. Today it is known for designing and manufacturing high performance components and sub-systems for aerospace and defence markets such as blast proof fuel bladders and braking systems for small and medium sized aircraft. They also have a growing energy business which specialises in high-performance compact printed circuit heat exchangers – part of its strategy in recent years to diversify away from its main market of selling parts to big jet-makers such as Boeing and Airbus.
So how is the company doing? It has been a strong performer over last 12 months but has been out of favour with investors in the short term following its third quarter update on 1st November, since when the share price is down over 10%. Indeed, the announcement of weaker than expected revenue guidance, production problems and a £20m write off of faulty raw materials has not been taken well. On top of this, the Aerospace and Defence sector as a whole is still wrestling with the uncertainty over US sequestration, which is the term used for the US budget cuts which are estimated to reduce defence spending by approximately $29bn in 2013 and $10bn in 2014. About a quarter of Meggitt’s revenues are derived from US military markets so like many of its peers there is well-publicised uncertainty.
The question for investors is whether this setback is an opportunity to buy into a company that is optimistic about growth in its civil aerospace and energy markets or whether the recent share price weakness is justified given the recent operational weakness and unknown extent of future budget cuts.
Last week we saw a dramatic 10% fall in share price of BSkyB as it was announced that they had lost out to BT in the bidding to secure the three-year rights to show Champions League and Europa League football matches as of the 2015 season. BT’s winning bid of £900m is more than double the £400m that BSkyB and ITV jointly paid for the previous three-year rights and nearly 40% more than the £665m the duo are rumoured to have offered this round.
So has BT paid too much or did BSkyB drop the ball by bidding too little? From BT’s perspective the rights are probably worth more to it due to its perception that being able to offer sports broadcasts will differentiate its broadband service and thereby help it defend its number one position in this market against the likes of Virgin, TalkTalk and Sky. Furthermore, it is clearly a blow to its competitor, which has never lost a sports auction as important as this one. From BSkyB’s perspective its focus has always been on the Premier League, which it has tied up the rights to until 2017, and not overpaying for rights that are far less important to it (European football represents only around 3% of viewing on its channels compared with around 18% for the Premier League) frees up cash for content investment elsewhere. Indeed, BSkyB has of late been quietly diversifying its television service away from sports and is now spending approximately £600m on creating original content such as Tunnel, Dracula and Strike Back. There is a saying in the industry that “content is king”, so this may well prove a sensible long term strategy, but creating content that people actually want to watch must be seen as harder than luring sports fans to football, cricket or golf.
This week Oliver Phillips focuses on GlaxoSmithKline.
Stocks in Focus: GlaxoSmithKline
GlaxoSmithKline is a global healthcare company that researches and develops a broad range of innovative medicines, vaccines and consumer health brands. Back in one of my September articles I mentioned the troubles that were emerging for the company in China regarding alleged mis-selling practices. Specifically, Glaxo was accused by authorities of bribing doctors, hospitals and government officials in an effort to sell more drugs at higher prices. Indeed, the company has since conceded it appears that some of its senior managers in China may have broken the law. This week I thought it would be interesting to update readers on how this is affecting sales in the region. Put bluntly, the figures are far from good; in its recent Q3 results (the first meaningful update since the issues of corruption were revealed) the company reported that pharmaceuticals and vaccine sales in China fell 61% over the quarter. However, this must of course be viewed within the context that, whilst it has been important source of revenue growth in recent years, China represents only 4% of Glaxo’s global drugs sales at present. Moreover, despite this hiccup, Glaxo reaffirmed their financial guidance for year-end and is entering an exciting period of new drug launch activity that could drive future growth. Chief executive Andrew Witty commented that the company remains committed to China, but has work to do in earning back the trust of the Chinese people. One should also point out that the investigations in China have not just impacted Glaxo; other pharmaceutical companies are now being scrutinised, causing a general climate of caution for all concerned.
This week Oliver Phillips focuses on the UK Power Market…
Points of View: The UK Power Market
Last month I discussed the potential ramifications of Ed Miliband’s surprise price-freeze comments at the Labour party’s annual conference. Since then there has been a flurry of news and reaction with Energy companies announcing price hikes in the region of 10% and bosses subsequently being called in front of the Energy and Climate Change Committee (ECCC) to justify them.
On the one hand Energy companies are defending their profits by blaming price rises on green taxes, transport costs and surging wholesale prices. On the other hand, the so-called “big 6” suppliers are accused of using a broken market to make excess profits from struggling consumers.
Analysing the situation dispassionately, profits margins achieved by the generation and supply of electricity in the UK do not appear to be excessive; the FT reports they are in the region of 2-4%. However, the issue is perhaps clouded by the fact that the likes of Centrica (the parent company of British Gas) have other more profitable businesses that make its overall margins considerably larger and therefore open to attack.
From an investment standpoint, the furore brings unwelcome political risk to the UK power market, which inherently requires a stable political environment and credit rating in order to attract the investment needed to secure future energy supplies. One must therefore hope that a status quo is reached relatively soon. The most likely scenario is that the big 6 agree to market reform, making it easier for customers to compare costs and switch in exchange for the government removing some of the green taxes and other obligations that are pushing up prices.