Managing expectations will be very important over the next few quarters at Lloyds (LSE: LLOY), Unilever (LSE: ULVR) and BT (LSE: BT-A). For their investors, the biggest risk now going forward is earnings season, although — if recent trends can be trusted — their shares could well surprise investors with a long-term view when quarterly figures are due.
Unilever remains my favourite pick, and while I’d still avoid Lloyds, I consider BT to be a strong long-term value play.
Lloyds: What Lies Ahead?
Its last trading update in May pushed up the stock to 82p from 77p; the shares rose to their 52-week high soon after the General Election when they hit 89.35p, which is also their five-year high.
They currently change hands at 85p, a price that implies a valuation of 12x for 2016 net earnings (P/E) and 1.3x tangible book value. UK economic growth is the most important element to gauge its performance and any possible upside — and I am not sure that this is such a good thing.
The UK is better positioned than South European countries, but a strong growth rate, a weaker pound and significantly higher interest rates are not exactly what I expect here, so I’d be cautious with Lloyds — but nonetheless I’d keep a close eye on its next quarterly update. Pay attention to trends for return on tangible equity, in particular. Its interim results are due on Friday.
Unilever Delivers
The consumer giant reported a decent set of quarterly results last week, which confirmed the view that management is doing a good job in difficult market conditions, particularly in emerging market.
Currency movements are problematic, but the business is sound and is proving to be more resilient than analysts thought it would be after a poor 2014. Is Unilever a buy, though?
Consider that if its stock rose to 3,400p from its current level of 2,900p, its implied valuation based on P/E multiples over the next couple of years would be in the region of 25x, which admittedly doesn’t signal a hard bargain, but could fall to 18x-20x if its growth rate and margin beat estimates — that is a distinct possibility, and I’d bet on that.
Noteworthy: Unilever has now surprised investors for the second quarter in a row. Previously, its stock rose more than 2% in mid-April on the back of solid first-quarter results, while on Thursday it closed up 1.61%, outperforming the FTSE 100 (-0.18%) on the day.
You’ll have to wait until October for its third-quarter results… but how about buying the shares of BT in the meantime?
BT: There’s Value In It
BT’s management doesn’t have an easy job to keep up with a fast-rising equity valuation, yet things are certainly moving in the right direction.
The telecom group’s pension deficit remains a threat to long-term value, but its shares, at 468p, were up 1.5% on Monday, outperforming a flat market in the wake of encouraging figures from EE, the mobile operator that BT acquired earlier this year.
Not only EE has become more profitable at operating level, but its core cash flows are up almost in the double-digit territory in the first half of the year, which is great — you might even be entitled to think that the hefty premium that BT paid for EE was fair.
BT’s first-quarter results are due on Thursday, and I doubt investors would be proved wrong if they decided to bet on its shares at their current valuation of 15x P/E for 2015 and 2016, but for me one key question is how long it will take for BT to surge to a more appropriate valuation of 750p a share — a level that its stock recorded 15 years ago.
BT could reward your patience, I’d say.
