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HB Markets Breakfast Today including: Domino's Pizza and Next
The markets
Market opening: Early indications suggest an almost-flat market at the opening, with some nervousness ahead of a French bond auction for up to €8bn of securities. France’s AAA rating is currently under threat.
New York: The S&P 500 closed flat (+0.02%) yesterday, as an increase in factory orders helped offset renewed fears of a slowdown stoked by signs of business investment cooling.
Asia: Doubts over the ability of Eurozone countries to refinance debt saw investors exit risky equities. The Nikkei shed 0.8%, while the Hang Seng was trading at +0.2% at 7.00 am UK time.
Continental Europe: The German DAX and French CAC 40 lost 0.9% and 1.6% respectively. Italian bank UniCredits hugely discounted €7.5bn right issue highlighted the potential difficulty for European banks trying to raise capital. Investors were also spooked by the fear that commercial banks are unwilling to lend to each other. A record €453bn was parked by commercial banks in overnight deposits at the European Central Bank.
UK small caps: The FTSE AIM All-Share closed flat yesterday.
Today's news
Negative outlook on British banks - Moody's
Moody’s senior vice-president Elisabeth Rudman said that the operating environment for British banks was very challenging and the rating agency had a negative outlook on London’s banking system. However, she said that recent measures to strengthen capital and liquidity levels have placed British banks in a better position than their European peers. Her remarks, though, did not imply another ratings downgrade. Moody’s had in October cut the ratings on Lloyds, Royal Bank of Scotland, Nationwide Building Society, Santander UK and seven other building societies.
More sacrifices needed - Papademos
Greek Prime Minister Lucas Papademos has urged union and employer groups to accept cuts in pay, along with other sacrifices, to help make the country competitive again and return it to a path of sustainable economic growth. Tax and pension reforms are a pre-requisite to resume the much needed €130bn bailout and avoid a debt default.
Company News:
Domino’s Pizza, the fast food-chain, yesterday released an interim statement for Q4 2011 and FY2011 ending 25th December 2011. System sales, which include sales by franchisees, increased 9.5% y-o-y to £145.0m from £132.5m for the 13-week period. Annual system sales increased 9.4% to £530.6m from £485.3m in FY2010. Q4 2011 like-for-like sales (from 604 mature stores) grew 3.6%, while that for FY2011 increased 3.0%. Like-for like sales in Q4 2010 and FY2011 was 10.3% and 11.9%, respectively, from 553 mature stores. Comparable sales in UK stores increased 4.0% in Q4 2011 and 3.7% annually. Comparable store sales in Ireland declined 1.0% and 4.1% in Q4 2011 and FY2011, respectively. Online sales increased 39.6% y-o-y in Q4 2011 to £53.1m from £38.1m. Annual online sales increased 43.0% to £183.1m from £128.0m in FY2010.
Our view: Online sales now form 44.3% of all deliveries in the UK, up from 35.8% in FY2010. The launch of new products and a new application for phones helped sales growth. The trading update is largely in line with expectations and the market has already factored-in this growth. We recommend a Hold.
Next (LON:NXT)
Clothing retailer Next released a trading statement for the period between 1st August and 24th December 2011 yesterday. The strong sales growth in Next Directory (+16.9% in the five month period) helped offset disappointing performance in the Next Retail division (-2.7%). Consequently, Next Brand sales increased 3.1% in the period. Year to date, Next Directory sales grew 16.0% and Next Retail sales declined 2.2%, resulting in overall company sales growing 3.2%. Management recognised that sales were 'disappointing' considering 2010 sales were affected by heavy snow. Management cited decreased confidence levels owing to the Eurozone debt crisis, credit crunch felt by businesses and consumers, high unemployment and inflation, and warm winters and heavy discounting by rivals for lower sales. Next also lowered its pre-tax profit forecast for the second time to £558m-£572m from a high of £590m.
Our view: Though the company has grown sales this year, the picture looks murkier for the short-term future. Management’s negative view on 2012 is also far removed from its earlier expectation of recovering significant recovery in demand in the second half of 2012. We believe pressure on discretionary consumer spending remains significant, and Next’s trading update could set the tone for the Christmas trading updates for the sector. We recommend a Hold on the stock.
Economy News:
UK Money supply
M4 in the UK decreased at a slower 2.6% y-o-y in November after declining 2.7% y-o-y in October. Month-on-month, M4 declined 0.6% in November as against a 0.3% drop in October. The Bank of England’s preferred gauge of money supply that it uses to assess the effectiveness of its asset purchase programmes decreased 3.7% y-o-y in the three months to November, compared to a decline of 5.1% y-o-y in the three months to October.
Our view: Weakness in money supply will increase expectations of the central bank expanding its stimulus programme in February. The programme was last increased in October 2011, when the Bank of England sanctioned £75bn of additional bond purchases. Lack of growth in broad money was one of the primary reasons cited then.
UK Construction PMI
The Markit/CIPS Construction Purchasing Managers' Index (PMI) improved to 53.2 in December from 52.3 in November. The index measures building activity in the housing, commercial and civil engineering sectors, with a reading above 50 indicating expansion.
Our view: Economists had expected the index to shrink to 51.5. Construction contributes only 7.6% to the gross domestic product and with the manufacturing sector shrinking in Q4 2011, the positive construction figures do little to dispel concerns that the economy contracted in Q4 2011.
Eurozone Composite PMI
Markit's Composite Purchasing Managers' Index (PMI) increased to 48.3 in December from 47.0 in November and ahead of the preliminary estimate of 47.9. A reading below 50 indicates contraction in the economy. Germany's composite PMI figure read 51.3, signalling the economy's return to growth, while the reading for France was 50.0, meaning the French economy had stopped contracting. The index showed that economic activity in Italy (PMI-44.2) and Spain (42.1) contracted in December.
Our view: The index contracting for the fourth straight month in December fuels fears of an 'official' recession (contraction in economic activity for two consecutive quarters) in the Eurozone. The sharp contrast in growth between the core and the peripheral economies highlights the two-speed nature of the economy in the Eurozone.
Eurozone Inflation
Consumer price inflation in the Eurozone expanded at a slower 2.8% y-o-y in December, as against the 3.0% y-o-y increase in November, according to the preliminary estimate by Eurostat, the European Union's Statistics Office. A detailed country wise breakup of inflation was not available.
Our view: This could be the first sign of softening prices in the Eurozone creating some room for an interest rate cut by the European Central Bank to boost the struggling economy.
US Factory orders
Factory orders in the US rose by 1.8% in November following a revised 0.2% (-0.4% previously) decline in October, the US Department of Commerce reported yesterday. The rise in factory orders comes after a decline for two consecutive months as increased demand for transportation equipment offset the decline in computers and electronics. Demand for durable goods increased 3.7%, and that for non-durable goods increased 0.3%. However, demand for capital goods, a measure of business investment, fell 1.2%. Unfilled orders, an indicator of future demand grew 1.3%.
Our view: Factory orders rose by rather less than the 2.0% increase expected by economists. Softening demand for capital goods is a sign that business investment is cooling amid concerns of a global slowdown and unfavourable government tax credits.
