… The new finance director John McConnell, who joined the company in July 2009, has just made his debut purchase of 750,000 shares at 33.7364p. This is a generous vote of confidence for investors going forward.
A glance at the above chart of the FTSE 100 shows that it has been a relatively flat week for equities, with the early gains being offset by weakness later in the week.
A feast of upbeat earnings reports helped kick the week off strongly, with better than expected results from the majority of US bellwether companies raising the bar on perceptions going forwards.
As the week progressed a further slew of well-received US earnings reports from the likes of Yahoo, Texas Instruments, IBM, Caterpillar, Goldman Sachs, etc failed to excite the market from the apparent onset of earnings fatigue.
Sentiment was also dented by downbeat macroeconomic news, with poor US housing data and weaker than forecast UK retail sales in September raising concerns that a greater than 50% rally in equity markets since March had outpaced earnings prospects.
Technical analysis of the above chart indicates that the medium term trend remains strong, with the blue chip index hitting fresh highs for 2009 this week. However, it is worth noting that the relative strength index (RSI) has refrained from moving inline with the underlying index and this divergence suggests that the momentum behind the recent strength is low and could be easily evaporated.
Minor support is seen at the historic resistance level of 5190 and a close below this could trigger a further move down to more significant support at 5000.
In summary, I believe that equities are at a major inflection point. On the one hand, the consensus now is that the bottom of the global economic crisis has passed and the fresh high this week confirms that the upward trend remain intact.
However, equities have come a long way over the past six months and if the market is at a point where even strong and better than expected results are a selling point, it becomes tough to see what can provide further upside.
Technical support levels are likely to be in focus, with the upward trend seen as continuing unless major support from the previous low and 50 day exponential moving average (EMA) at 5000 is breached.
The top performing sector over the past six months has been automobiles and parts companies, with the sector average gaining around 80% during this period. A related company I have been following closely is Inchcape (Epic: INCH), which is a leading, independent international automotive distributer and retailer operating in 26 mature and emerging markets.
Inchcape was hit extremely hard during the global downturn and the shares lost around 95% of their value from May 2007 to January 2009. As credit became scarcer and harder to access, sales dried up and several auto manufacturers were bailed out by various governments.
However, the group updated the market on the 20th October, with a better than forecast third quarter performance and raised its earnings estimate going forwards.
The car dealer said its full year results would be significantly better than expected, with third quarter turnover rising 2.2% compared with the second quarter, indicating that the market may be bottoming out. Full year pre-tax profits have also been raised from £120 million to £140 million in 2009, with 2010 expected to remain relatively static.
The company has benefited significantly from the governments car scrappage incentive, which helped stem the falling demand, although the underlying demand for new cars remained weak.
The group also benefited from increased market share across its broad geographic portfolio, with momentum improving in Hong Kong and Australia, where the economies are improving at a faster rate. The UK, Hong Kong and Australia account for more than half the group’s total sales.
An extensive restructuring program has also improved the company’s cost base over the past nine months, with 2350 jobs having been cut and the closure of 31 sites is forecast to enable the group to be broadly debt free by the end of 2009, compared to net debt of £408 million the year before.
Many analysts now see the potential for a cash pile to develop as we move into 2010 and therefore see the potential for the company to pay a dividend much earlier than anticipated.
The new finance director John McConnell, who joined the company in July 2009, has just made his debut purchase of 750,000 shares at 33.7364p. This is a generous vote of confidence for investors going forward.
As can be seen from the above chart of Inchcape the shares have been in a strong upward channel formation since March.
The moving averages have crossed over and are inclining, which suggests that the medium term trend is now higher and the 50 day EMA coincides with the lower boundary of the channel, which should provide support for the shares.
Growth is unlikely to significantly escalate until the second half of 2010. However, I believe the shares are a turnaround play and if we combine our earlier analysis of the FTSE 100, with the strong update and technical support for Inchcape, I believe the shares could trend higher.
At the time of writing the share price is 33.35p and my short term opinion is for the price to move higher. Near term targets are seen at 35.12p, 36.4, and 38.55p. I shall set a fairly wide stop loss marginally below the 50 day EMA and lower boundary of the channel at 29.90p.
This report was written by Mark Allen – Head of derivatives at Simple Investments Stockbrokers. The writer does not hold a position in Inchcape. The material in this report has come from Simply Charts and Inchcape’s corporate website.