Good Afternoon ,
Markets opened lower snd stayed lower today despite efforts to generate a rally this afternoon after the release of the US Confidence index which showed a sharp jump month on Month. Wall Street opened lower , rallied to test positive territory but gave up as the worries about the Banks overwhelmed positive news such as IBM raising its dividend by 10%.
Ireland was all about Aer Lingus and ICON today.
Aer Lingus fell 20% today after it issued a negative Q1 IMS update this morning, with the yield and profit outlook deteriorating significantly since the start of March. The deterioration in March yields was much greater than the impact of the timing of Easter, and greater than we expected. Short-haul average fare fell by 23.6%in March compared to -1.6% in Jan & Feb, while long-haul average fare fell by 25.7% in March compared to -14% in Jan & Feb. The deterioration in March more reflected the underlying need to increase discounting and promotions than the impact from the moving of Easter back into April. More importantly, demand continues to need a strong level of promotional activity. We now expect that yoy yield declines will be in the low 20%’s, compared to our previous estimate of -17% yoy. Assuming a 21-22% yield decline, our operating loss projection increases to €100-110m from €60m previously. The increased loss will reduce our forecast end-2009 net cash balance to c.€350m from €400m. The IMS also confirmed that Aer Lingus is reviewing its fleet size, and in particular that it is in active discussions with Airbus over its long-haul delivery schedule – a reduction in its long-haul fleet deliveries would materially reduce capex and is necessary now to help protect the company's net cash position. We have a BUY recommendation on Aer Lingus.
The Banks also were under pressure in Ireland today with AIB down -10% and BOI down -6%. Irish Life on the contrary rose by 6.7% AIB announced that it is raising an incremental €1B of government guaranteed bonds with a maturity before the end of September 2010 (the expiry of the Irish government guarantee which is to be modified to cover new term debt issues). AIB is reported to be paying 185 bps over mid swaps compared to 65 bps when it last raised funds under the program in November.
Icon reported Q1 net revenue was $219.8m (slightly behind our expectations of $221.6m), EPS came in at 35c compared to our forecast of 34.6c. Book to bill was 1.21x (we forecasted 1.17x) , with net new business wins of $265m (down 28.2% yoy, but up 5.8% from Q4 2008) – commentary suggested that “business activity, which was slow to develop early in the quarter, finished strongly…”. The company reiterated guidance, but pointed towards the lower end of the previous range of $1.40-1.52 for the full year (a positive outlook given the 20% downgrade cautious commentary from PPD last week). The company also announced the purchase of a 100 bed phase 1 unit in the US which will have a dilutive effect of 4-6c in the current year. We will look to reduce our forecasts to c.$1.42 (pre dilution) and to c. $1.36 post dilution. At $15.95 the stock is now trading on 10.8x reduced earnings expectations vs PPD’s current multiple of 13.9x 2009F EPS multiple.. On a longer term view we remain BUYERS and think the current levels provide an attractive entry point.
The Building materials stocks across Europe were down today with the exception of CRH which managed a 0.3% gain. Grafton fell -4.8% and Kingspan fell byt only -2.2% continuing to be very resilient.
Elsewhere Smurfit Kappa retreated by just under -1% Ryanair fell by -6% as the Swine fever pandemic worries continued.
In the USA , the financial sector was lower today after comments from Elizabeth Warren, who chairs the US Congressional Oversight Panel for the Troubled Asset Relief Program. She said the adverse Scenario Stress test of the health of the 19 largest U.S. banks is “disturbingly close” to current economic conditions. Warren said that while the test may be rigorous the government’s recent document describing the test’s methodology lacked critical details, She said, ideally, Federal Reserve on should would have provided enough detail to allow outsiders to run their own version of the stress test on the largest banks. The US government plans to release the results of the tests on May 4. Ms. Warren also said the public needs details on how rigorous the stress tests really were because the macroeconomic assumptions involving unemployment were not that much more severe than current conditions. Ms. Warren said in order for the stress tests to be taken seriously, the government needs to prove they were robust. “The stress tests will make a terrific contribution if they are tough and transparent,” Ms. Warren said. “If they are not, they will be useless.” Ms. Warren said there is a concern that the government would have to conduct another stress test if the economy in the next few months hits the conditions outlined in the adverse economic scenario.
Michael O’Leary was in the news again , on the one hand saying that Ryanair will not bid a third time for Aer Lingus but that it also had no plans to dispose of the stake. In a slightly more outrageous tone he commented on the Swine Flu crisis saying that it is a tragedy only for people living in slums in Asia or Mexico," he said. "But will the honeymoon couple from Edinburgh die? No. A couple of Strepsils (a brand of throat lozenges) will do the job."
The key economic statistics today were a bit mixed. The US S&P Case-Shiller 20-city home price index fell 18.6% year over year in February. Fifteen of 20 major metropolitan areas posted price declines of more than 10% from a year earlier with the Sun Belt continuing to be hit hardest. Nationally,US home prices are at levels similar to the third quarter of 2003. There was some deceleration in the rate of decline in some of the markets
The U.S. consumer confidence index jumped to 39.2 in April from 26.9 in March, the Conference Board reported Tuesday. The 12.3 point gain in the index was the fourth-largest ever in the 32-year history of the survey. Economists were expecting the index to rise about five points to 30.5. The expectations index is now back at levels seen at the time of investment bank Lehman Brothers' collapse last September.
At 5pm , Wall Street is down about -0.25% and Ireland , European and UK markets are all down between -1% and -1.5%
Having been marketing and meeting many clinets over the past week , the pullback is being prayed for by those whose portfolios have been too defensive and underperformed into the recent rally. This is the opportunity which has been awaited... I got the impression that many institutions were awaiting a pullback to become a bit more aggressive in their portfolio posture.
Have good evening
Liam
___________________________________________
Liam Boggan
Merrion Stockbrokers
www.merrion-capital.com
Disclaimer www.merrion-capital.com/disclaimer.html
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is a limited liability company whose registered office is at
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