Today I am running the rule over three headline makers in Tuesday business.
Enquest
Fossil fuel leviathan Enquest (LSE: ENQ) was helping lead the FTSE onwards in Tuesday’s session and was last 3.8% higher on the day. The stock has tracked steadily lower in recent months alongside a spluttering oil price — indeed, Brent touched its cheapest for six months below $50 per barrel just yesterday.
And with the chronic supply/demand imbalance still casting a pall over the fossil fuel sector, I reckon the prospect of fresh oil price weakness should drive Enquest’s shares lower before much longer. Latest Baker Hughes data last week showed the number of US rigs rise again, to 664 at the last count, representing the fourth rise during the past five weeks. With output spewing forth elsewhere and a weak global economy failing to suck up the surplus crude looks set to fall again.
The City expects Enquest to punch a third successive earnings decline in 2015, and a 97% collapse is currently pencilled in. While it is true that for the time being the London firm remains well capitalised, the capital-intensive nature of its business — particularly in the cost-heavy regions of the North Sea — could easily see the balance sheet buckle in the event of persistent oil price pressure, and cast doubts on the economic viability of its projects.
SDL
Information management provider SDL (LSE: SDL) failed to ignite the market in today’s session and was recently dealing 3.3% lower. This is despite the business reporting that revenues advanced 4% during January-June, a result that helped drive profit before tax and amortisation 39% higher to £9.3m.
The business advised that revenues and profits from its Language Services arm exceeded its expectations, and although its Technology division disappointed during the period, sales are likely to improve as its pipeline kicks in. With SDL having overhauled its sales team, and its order book boasting a better quality of contracts versus previous years, the future is looking good for the Maidenhead business.
This view is shared by the City, and earnings at SDL are expected to fly 32% higher in 2015 and 19% next year. Although these numbers leave the software play dealing on P/E multiples of 20.7 times for the current period and 17.2 times for 2016 — above the threshold of 15 times that marks decent value — I believe that sub-1 PEG readings through to the end of next year illustrate SDL’s terrific value relative to its growth prospects.
Smiths Group
Conversely, investors welcomed Smiths Group (LSE: SMIN) with greater fanfare than SDL in Tuesday trade and sent shares in the company 5.1% higher from Monday’s close. The engineer shot skywards following media reports that North American activist hedge fund ValueAct had bought up to 5% in the business.
The rumoured share purchase has led to chatter that Smiths Group could be broken up and sold off, with Credit Suisse speculating that such a move could value the business at £15 per share, up from around £12 currently. While the size of the company’s pension deficit remains a massive problem, not to mention the size of its asbestos-related liabilities, the strength of the firm’s medical devices and John Crane seals division has led ValueAct to take the plunge.
The City currently expects Smiths Group to report a 1% earnings decline for the year concluding July 2015, although a 1% bounce is predicted for the following year. Consequently the company changes hands on hugely-attractive P/E ratios of 13.7 times for this year and 13.4 times for the following period. So I believe the capital-based business provides plenty of value for money regardless of ValueAct’s immediate plans.
