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Trader Talk is produced by a team of active traders, analysts and various derivatives professionals from multiple organisations. Trader Talk provides comment on equities, commodities, and other financial instruments based on both technical and fundamental analysis.
FirstGroup: To travel higher?
A glance at the above chart of the FTSE 100 shows it has been a resilient week for equities despite negative newsflow from Europe.
Ratings agency, Standard & Poor’s, downgraded nine Euro-area nations, including stripping France and Austria of their prized triple A ratings, a reminder of the ongoing problems facing the indebted region. More importantly, the European Financial Stability Facility also had its credit rating cut, by one notch to AA+, which could make any significant increase in the lending capacity more difficult.
Despite the downgrades, the impact has been relatively muted. Subsequent government bond auctions from the region improved, with Italian, Spanish and French yields actually falling. Even an auction of EFSF six-month bills met the bail-out funds target of €1.5 billion, suggesting the rating agency’s action was anticipated and factored in to market prices.
News that Athens resumed negotiations with holders of Greek debt over a planned bond swap that would avert default, combined with the International Monetary Fund seeking to more than double its war chest by raising €600 billion in new resources, provided a renewed sense of urgency among policymakers.
Portugal, however, cast a small shadow over Europe, as the cost of insuring against a sovereign default increased dramatically and a report from the World Bank warned of the “real” risk should the Euro area debt crisis deepen. It lowered its prediction for world economic growth to 2.5% in 2012 and 3.1% in 2013, well below the 3.6% previously forecast for each year.
Strong economic data helped counter much of the Eurozone anxieties, with further evidence of a soft landing for the Chinese economy and signs of an upswing in the US, lifting global stocks, as measured by the MSCI world index, to a three month high.
Beijing reported the world’s second-largest economy grew faster than expected in the final quarter of 2011, although at its weakest pace for 2-1/2 years, sending Chinese stocks to their biggest one-day gain in more than 27 months. Meanwhile a wave of strong data from the US revealed manufacturing output jumped 0.9% last month, the highest for a year and unemployment continued to improve.
The combination of a stronger global macro-economic outlook and generally positive corporate earnings sent US stocks to six-month highs. Investment bank Goldman Sachs gained 7.7% after fourth quarter profits topped Wall Streets tempered expectations.
Technical analysis highlights the strong medium-term upward trend, with the FTSE 100 gaining over 650 points in the past eight weeks. Major resistance at 5700 has capped much of the recent price action, but after consolidating around this level for most of 2012, a fresh closing high at 5741 indicates the index is breaking out to the upside, with the next resistance seen at 6000. Support is likely at 5700, 5600 and 5370.
In conclusion, the evidence implies that the Eurozone’s problems have not seriously derailed global economic activity and many analysts have actually raised their forecasts for the US and China, in light of recent data. Even the Eurozone debt crisis temporarily appears more stable, with strong appetite for bonds and a sense of urgency among policymakers. The ease that this complacency can change is the major threat, but until then equities look likely to drift higher.
Given the strength in many cyclical stocks so far this year, several of the more defensive equities have been shunned. Bus and Rail operator FirstGroup (Epic: FGP) has fallen back towards its recent lows despite a robust interim management statement and strong income attractions.
The groups UK rail operations, which include First Capital Connect and First Great Western, saw passenger numbers rise, with like-for-like passenger revenue up 8% in the third quarter of 2011. Its bus operations also increased by 1.8% during the same period.
Management are part way through a turnaround programme, which includes investment in UK bus operations and remains focused on cash generation to support capital investment and debt reduction. Net cash generation is expected to be in the range of £100 million to £115 million.
The transport operator is a strong income play, currently yielding 7.7% and management re-affirmed its target to increase the dividend by 7% each year. It is forecast to have 1.7 times earnings cover in the financial year, suggesting the dividend looks relatively safe and on 7.5x earnings the group also looks comparatively cheaper than peers.
Chief executive officer, Tim O’Toole recently purchased 100,000 shares at 342.9p for a total of £342,931 and chairman, Martin Gilbert has been increasing his stake.
The above chart illustrates the recent weakness, with the shares losing 11% since the start of the year and now trading within close proximity of a three year low at 301p, which is likely to offer significant support to the price. With the oscillators in oversold territory and showing signs of bottoming-out, it suggests the shares may once again move higher from current levels.
In light of the earlier analysis of the FTSE 100, combined with strong income and technical attractions, I am buying shares in the company. At the time of writing the share price is 306.3p and near-term targets seen at 318.5p, 327.5p and 342p, with a tight stop-loss marginally below support at 295.8p.
This report was written by Mark Allen – Head of Derivatives at Simple Investments Stockbrokers. The writer does not hold a position in FirstGroup, but client accounts may. The material in this report has come from Simply Charts and FirstGroup’s corporate website.
