Do this week’s trading updates improve the buy case for Wm Morrison Supermarkets (LSE: MRW), Cobham (LSE: COB) or Hikma Pharmaceuticals (LSE: HIK)?
Morrisons
Sales at Morrisons fell by 2.6% during the third quarter, on a like-for-like basis. This headline figure from the group’s third-quarter trading statement triggered a 3.5% slide in the share price when markets opened this morning.
The fall in sales revenue seems to have been caused by two factors: price cutting and a reduction in vouchers. These caused sales to fall by 2.2% and 2.4% respectively, compared to the same period last year. The result was that like-for-like transaction numbers fell by 2% and the average number of items per basket was 1.9% lower. These numbers suggest to me that Morrisons market share may still be falling, albeit slowly.
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There are some signs of progress. Morrisons said that net debt at the end of the year is expected to be below the previous target range of £1.9bn–£2.1bn. I take this to mean that cash flow remains strong and the forecast 5.2p dividend is safe.
Morrisons shares now trade on a forecast P/E of 18, falling to 15.5 for 2016/17. The prospective yield of 3% is useful but not outstanding. Overall, I’d say the shares are fully priced at the moment.
Cobham
Engineering firm Cobham warned this morning that full-year profits are likely to be at the lower end of expectations. This isn’t as bad as the full-blown profit warnings recently delivered by Cobham’s peers Meggitt and Chemring, but it’s not great news.
Once again, the problem seems to be poor earnings visibility. Demand has been weaker than expected from the oil sector and from clients in the Asia-Pacific region. Cobham’s revised earnings guidance suggests that adjusted earnings per share for the current year will be around 20p. This gives a forecast P/E of 14 at the current share price of 280p.
In my view, this valuation is ample. I wouldn’t buy Cobham shares at the moment, because there’s no reason to think that trading conditions will improve in the immediate future.
Hikma Pharmaceuticals
Shares in Hikma fell by around 5% on Monday, after the firm said that full-year sales of its generic medicines were likely to be below expectations.
Hikma said that sales of its colchicine gout treatment, sold under the Mitigare brand name, have been slower than expected. Generic sales are now expected to total $150m in 2015, a reduction from previous guidance of $175-$200m.
The generics business is the smallest of Hikma’s three divisions and generated just $79m of sales during the first half of this year, compared to $344m from injectables and $282m from branded products.
However, investors may be concerned that generics business is in terminal decline. Generic sales were $268m in 2013, $216m in 2014 and are expected to be just $150m in 2015. Profit margins are also falling. Last year, generics generated an adjusted operating margin of 52.3%. This year, that figure is expected to fall into “the high twenties”.
This decline could put pressure on Hikma’s earnings per share. The firm’s stock currently trades on a 2015 forecast P/E of 24, falling to 21 in 2016. Although Hikma does have a strong track record of growth, I don’t see this is as a compelling buy.
