Liams Last Post : New adventures ...markets succumb to bout of profit taking...

Good Afternoon ,

The Last Post has been a bit quiet for the last week or so as I contemplated the future and whether the last post was actually coming closer to the last post with a major re-organisation of the shareholding structure of Merrion and the exit of some of my colleagues. In the end I have decided to stay with Merrion and look to the future with my best rose tinted glasses on. It will be a challenge but frankly I enjoy markets and would like you guys to all do more business with me in any variety of equity or tradeable instrument that you choose.  You know you want to…

Markets over the last few weeks have been recovering and it has been wrong to panic and sell them but I get the sense that there is a bout of profit taking in store. The EU Stress tests have helped assuage fears re the banks and sovereign worries also this week and in general the raft of US and European company earnings reports have been positive.  The market though is dealing swiftly with those companies who do disappoint and signs of margin pressure and weakness of outlook is being met with sharp price falls.

In Ireland we are having a down day, volumes are light , newsflow also is light and the media stories are now about business after business which are falling under the control of the Banks. Anglo became a retailer today taking control of Arnotts the large Dublin Department store.  It is funny to see the banks which threw money at anyone who asked for it now behaving like good old fashioned banks and pursuing all and sundry through the courts as they seek to re-coup their money.

The economic news of the day was the US Durable goods orders. Which showed an against expectations decline in both the headline and in the ex transport component.  This is a worrying indicator as it is the second consecutive month of decline and coming as it did after the weaker consumer confidence numbers yesterday we are clearly  in double dip territory.  The Case Schiller house price index showed that US house prices are rising but very anaemically but that is a positive after all it was US house prices which burst the bubble on the whole imbalanced financial system back in 2007.

Most of the US company results today were positive surprises including Boeing and International paper but today despit the positve surprise which had been anticipated the stocks succumbed to some profit taking.

In Ireland there was a resilient performance by Ryanair after Michael O'Leary confirmed his sale of eur5m shares This typically marks a short term top for the stock but the stock only down -0.5% is a decent performance. Especially in the light of Easyjet falling -8% today after Stelios escalated the row with management over punctuality and operational problems.

 

Smurfit Kappa has been a stellar performer of late so it was not such a surprise when the stock cracked and fell -4% . The financials were all muted, BZWBK was in the news with the CEO saying that the four short listed prospective purchasers are impressed We believe that it might solve 1.9bn of the capital shortfall that AIB need when the sale completes.

 

Total Produce saw further investment on the part of Marathon investments in London who now own 20% up from 18%. The stock is cheap. I ran the rule over this one myself and would love to buy it. The problem is that the cash pile is not free cash but is tied up in associates so it is a more complex transaction than it looked. The valuation is very low and the size of the company only creates problems or it in terms of it being too small to justify proper analyst coverage and the liquidity puts it off the radar of most large institutional investors. It is cheap though and has a predictable and robust cashflow which has continued through this turbulent period.

 

Tullow truly now justifies the nick name put on it by its chairman Pat Plunkett many years ago when he was a broker before moving to join Tullow. Pat called it TOO LOW. The valuation is cheap , the stock istrading at a very low premium to its NAV and surely deserves a much higher premium as day after day it announces oil finds and positive appraisal results.

 

Icon disappointed yesterday despite reporting a bok to bill ahead of forecasts. The disappointent was due to a lower margin and weaker than anticipated performances from the Lab and early stage business. The earnings would have missed but for the lower tax rate. Company management seemed to be more optimistic about the overall tax rate being lower than their formal guidance but the market did not care yesterday. The worry is that Large Pharma is pressuring the CRO sector into lower margins. The mix of business is also different and slower to translate into revenue. This seems to be the same with PPD who also reported yesterday. The lower margin seems to have been better flagged at PPD though. Bookings were well ahead but the 1.4x book to bill is equivalent to a 1.25x book to bill so still ok. ICON generates decent cash with a positive cash generation of $27m during the quarter. The market had probably got ahead of itself with the positive reactions to previously disappointing news but the worry now will be that these numbers mark the start of a period of lower margins and perhaps slower revenue growth which may weigh on sentiment and have consequences for the rating...

 

I see Petroneft quietly sneaking up 10% today… this is one to watch…

 

Have a good evening

 

Liam

 

 

 

 

 

 

 

 

___________________________________________

Liam Boggan

　

Merrion Stockbrokers

Tel.: 353-1-2404171

Mob:353-87-2313505

www.merrion-capital.com

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