Stock Market Week: Blue chips set for bad week of sliding profits

Stock Market Week
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The Independent Online
INVESTORS WILL have to look for the stories behind the headlines this week as several blue-chip heavyweights come under the results spotlight.

The reporting menu features at least 10 FTSE 100 constituents and includes a large portion of utilities accompanied by a light serving of airlines, media and telecoms. In most cases, however, the profit numbers will be just a good excuse to talk about meatier subjects such as corporate action and future strategy.

The music group EMI is a case in point. Tomorrow's profits will be poor, with the earnings estimate service IBES going for pounds 224m compared with pounds 307m last time round.

The new executive chairman Eric Nicoli - a music industry rookie recruited from United Biscuits to replace Sir Colin Southgate - will have a task and a half convincing the market that EMI can go it alone.

Analysts believe that EMI's roster, which ranges from the Beatles to the Spice Girls, has failed to make much progress during the year, as racier acts stole the limelight.

The recent break-up of the pop sensation The Verve, another big EMI money- spinner, is also bound to cast a cloud on the current year.

On a happier note, industry experts are detecting a bottoming out in emerging markets which should underpin future demand for EMI's CDs.

The shares have rebounded from recent underperformance but the key question is whether the music giant can grow its market share in a challenging environment. Any signs of weakness will fuel rumours of a takeover by rivals.

The German media powerhouse Bertelsmann is still at the top of the predators' list, even though its long-term commitment to music is not assured. Rupert Murdoch's News Corporation has also been rumoured to have had a look. Canada's Seagram, which has had talks with the UK group, and even Disney could be interested.

British Airways has also had a turbulent year. The world's favourite airline did not live up to its billing and Tuesday's results should see profits more than 50 per cent lower at around pounds 287m. Some analysts are even more pessimistic.

One cause of the nosedive is a big jump in the interest bill, as BA's cash outflow increased the company's debt burden.

Richard Hannah at BT Alex. Brown believes that the airline's decision to flood a soft market with flights will affect sales growth. He thinks that revenue for the year will rise only 3 per cent to about pounds 8.9bn.

Costs, the traditional thorn in BA's side, should fare better with the plunge in oil prices driving fuel bills 12 per cent lower.

As for the future, improving global economies and decreasing overcapacity should help BA to take off over the next few years. Positive news on the alliance with American Airlines will also please the market.

Carlton Communications' interims will be a tale of two halves. Mathew Horsman at Investec Henderson Crosthwait believes the television division should report a cracking result as ITV advertising revenue has soared. Technicolor, the video-publishing unit, has also done well even though it is still bedding down the pounds 165m purchase of the US video-cd maker Nimbus. However, film and broadcast products will be flat, leading to profits of around pounds 154m compared to pounds 172m last time round.

Once again, the real interest lies behind the figures. OnDigital, co- owned by Carlton and Granada, has been put on the back foot by BSkyB's decision to give away its digital kit for free.

A marketing offensive by OnDigital is widely expected and analysts will press Carlton's management on the next stage in the digital war.

Utilities will come back to the fore with the tail-end of their results season. The water and electricity stocks, a traditional safe-but-dull play, have enjoyed a rerating in recent times as investors went off the highly-rated growth stocks.

National Power will be closely looked at. Since the ousting of its chief executive, Keith Henry, last month, the generator has been seen as the target of a takeover or break-up bid.

The chairman Sir John Collins has promised a strategic review and the market will want an update on its progress. The experts' view is that National Power could stave off the feared takeover if it replaces the confusion of Mr Henry's reign with a solid strategy. The pounds 2bn disposal of its Drax mega-power station, which could be followed by a big cash back, will be the other talking point. Centrica, Eletricite de France, Tractebel of Belgium and a host of US companies are thought to be interested. As for profits, they will be 20 per cent lower than last year at pounds 570m. A huge write-off of about pounds 1bn may add to the gloom.

United Utilities can also expect some tough questioning. Investors will want to know why it wanted to merge with National Power last year and what it intends to do after the collapse of those talks. The management's thoughts on future corporate action will overshadow a slight drop in profits to around pounds 450m.

The listing of the South African mining giant Anglo American will provide the main non-results-related event.

Shares in the group make their debut on Monday at around pounds 32, giving it a market value of some pounds 12bn. Its almost certain inclusion in the FTSE 100 early next month will make it a "must-buy" stock for tracker funds. The main problem will be that supply of shares will be tight as only 55 per cent of Anglo is available to investors. The founding Oppenheimer family and the De Beers diamond colossus effectively control the company and show no willingness to sell.

Anglo must hope to repeat the success of its compatriot South African Breweries. SAB shares rose some 30 per cent to a peak of 570p after its London float in March. Recently, they have fallen back to 500p ahead of Thursday's results. Yearly profits should be pounds 620m versus pounds 648m, but most of the market's attention will be focused on its ambitions to expand into Eastern Europe and Far East Asia.

Industry experts will scrutinise its takeover plans in the UK after rumours that it might be interested in struggling Greenalls.