Baker Street, London -- How much power can one man's words have? In days gone by political rhetoric could hold audiences spellbound. Gladstone used to speak for 6 hours on end during general election campaigns. Churchill roused the entire nation during its "finest hour". The modern day Cicero, however, is Alan Greenspan, chairman of the US Federal Reserve. A master of sagacious sound-bites, his comments massage the markets beautifully.
For most of the day dealers fretted about what he might say to Congress during a question and answer session this afternoon. Despite the fact that he was repeating the text of a speech he made last week, which sparked fears of a interest rate rise in August, many thought he might "fine tune" his message. Consequently London shares shed their initial gains in the early afternoon before recovering their poise to end the day significantly ahead.
Reckitt & Colman (LSE: RCOL), for long the ugly duckling of the FTSE 100, is making the most of its few days in the sun. The household products maker's shares shone for the second day in a row following yesterday's announcement of a planned link-up with Benckiser of Holland. The stock moved 37.5p ahead to 822.5p. This is still 28% shy of their 52-week high of 1150p. The market believes another suitor, possibly Unilever (LSE: ULVR), might make a swoop for the group at a higher price than the current merger offers.
London's giant pharmaceutical stocks led the market upward. Bullish reports in the US were responsible for this change of direction. SmithKline Beecham(LSE: SB.) soared 34p to 774p and Astra Zeneca(LSE: AZN) improved 49p to 2381p. Glaxo Wellcome(LSE: GLXO) also rose 73p to 1752p ahead of its interim results, which are due to be published tomorrow. Analysts hope to hear more about Relenza, Glaxo's wonder drug designed to combat flu. Many are worried that take-up has not been good during Australia's winter. Several think this might put state healthcare authorities in the Northern Hemisphere off reimbursing taxpayers who buy the drug on prescription.
Cable companies' shares were heavily in demand as well today as further consolidation in the sector seemed likely in the not too distant future following the sale of Cable & Wireless Communications(LSE: CWZ) to NTL. CWC's parent Cable & Wireless(LSE: CW.) jumped 12.5p to 784p and Telewest (LSE: TWT), which missed out on the purchase, was up 10p to 280.5p, as a flurry of brokers decided the company looked cheap and had been unfairly punished.
After Nasdaq's rise last night some tech-related stocks in London perked up. Mobile telephone operators attracted strong support. Orange (LSE: ORA) moved 18p ahead to 998.5p. Elsewhere Eidos (LSE: EID) ran up 82.5p to 2910p following the games maker's exclusive six year agreement with International Sports Multimedia to publish computer and video games based on the Olympics, signed yesterday.
Freeserve (LSE: FRE) rose a heady 16p to 211.5p on heavy turnover again of 43.49m shares. The Internet access provider's parent Dixons (LSE: DXNS), the electrical retailer, tagged along for the ride as well, soaring 25p to 1254p.
Barclays (LSE: BARC) continued to rise, up 24p to 1803p, after the appointment of new chief executive Matthew Barrett, as discussed in today's Lunchbox.
Investors in football shares were relieved that the Restrictive Practices Court had not upheld the Office of Fair Trading's submission that the Premier League's £743m deal with BSkyB (LSE: BSY) was uncompetitive. The satellite broadcaster leapt for joy, rising 14p to 580p. Its one time target, Manchester United (LSE: MNU), also celebrated, putting on 2.5p to 214.5p. A "buy" tip from broker Warburg Dillon Read also helped.
Two mid cap stocks attracted the attention of bidders after both exhibited patches of under-performance. Lloyd's vehicle LIMIT (LSE: LIM) rose 12.5p, or nearly 10%, to 141p, even though it rejected an approach. Pubs outfit Greenalls (LSE: GREW) was linked with a number of larger operators after its profits warning yesterday. The shares shot up 18p to 347.5p.
Despite reporting a 17% rise in interim profits before tax to £875m Abbey National (LSE: ANL) unfairly fell 46p to 1137p. These results were above most analysts' expectations but the market is hammering banks at the moment and the stock has succumbed to profit takers. Rival Halifax (LSE: HFX) dropped another 11p to 687p. And Woolwich (LSE: WWH), which reports tomorrow, slid back 5.5p to 357.5p.
Cadbury Schweppes(LSE: CBRY) also reported interim results this morning. These showed that profits before tax had dropped £15m, or 5.6%, to £252m in the first half. Consequently there seemed more logic to the 10p fall in the share price. The stock finished the day at 414.75p.
British Steel (LSE: BS.) returned to the FTSE 100 this morning, replacing supermarket chain Asda (LSE: ASSD), which has been taken over by US giant Wal-Mart. However, the metal producer's shares immediately fell 7.25p to 168p. This happened on fears that motor companies Renault and Nissan might switch to rival steel makers in Europe to satisfy their supplies.
Water stocks continued to cascade down following the Ofwat report on pricing yesterday. Thames Water(LSE: TW.) and Severn Trent(LSE: SVT) were the worst hit on fears that dividend payments might have to be cut. Thames shed 36p to finish at 922p and Severn was off 21.5p at 914.5p.
This week sees interim results for a number of UK companies. It is a time of intense activity for equity analysts and the market gets very excited about the whole process. As an ex-analyst I thought it might be interesting to lift the veil a little on the process.
All equity analysts have spreadsheet models of the companies they follow. This would certainly include the three major financial statements: profit & loss, balance sheet and cash flow. More important, though, would be the operating details such as volumes, prices and margins. The size of these spreadsheets varies; some industries lend themselves to enormous amounts of data crunching, while others are less sensitive to data. It can become a marketing advantage for an analyst to boast about the size of his spreadsheet, but if they get over-large the sheer time required to maintain it can be too demanding. The danger is that the analyst becomes obsessed with detail and misses some fundamental error, and there are few things guaranteed to make an analyst more uncomfortable than to admit an error in front of the sales force.
The model will forecast earnings several years out, but it will be constantly updated. As a general rule the market is most focussed on the prospects for 18 months time. His, or her, forecasts of earnings per share and other important parameters and ratios will be published in research notes and on the investment bank's internal communication network. At regular intervals the analyst will address the sales floor and talk to clients about the company as news comes up, and he will invariably be asked what the earnings forecasts are. This normally means for the next full year, but as interim results approach interest will focus on those.
As the date for results approaches, the analyst will spend more time fine-tuning his model and this will naturally involve calling the company and discussing the upcoming results. This is where the game theory starts. Initially the investor relations (IR) officer will have little idea of what they will be, so he will talk in fairly general terms. But closer to the date he will pretty much know the numbers and will guide the analyst into a range of estimates. This has to done before the start of the close season, that period between the end of the financial reporting and the announcement of the results.
The IR officer wants to produce figures that will please the market so he has an interest in talking expectations down. The analyst wants to be as accurate as possible, but he knows the IR officer's tricks so he compensates for that. This rather recondite process becomes an end in itself with analysts taunting each other with their forecasts and telling clients what their estimate is and why it will be the most accurate. Into this will be factored as many variables as possible, such as foreign exchange rates, but most notably exceptional items. Although a company will always announce a big disposal, and the price it has achieved, it probably won't detail the tax effect. That can have a major impact on the bottom line.
Statutory earning per share calculations will include all items in company's profit and loss account, even exceptional profits from disposals. This can have a hugely distorting effect so analysts will forecast adjusted numbers. For example, Misys (LSE: MSY) recently reported basic EPS of 10.8p, but adjusted EPS of 16.2p. The difference was the loss on disposal they had to include in basic EPS.
Eventually, the analyst finalises his model and announces his best estimate. On results day the analyst will be in the office at 7am, ready for the results to be declared over the screens at 7:30. He than has about 30 minutes to make a very quick interpretation before addressing the sales force at the morning meeting with his instant views. Afterwards he will have time to tinker with the model before going to the analysts meeting where they will get a more detailed explanation and the chance to ask questions. Most important is the tone and body language the CEO uses as he discusses current trading conditions and the outlook for the year ahead and any new business developments. By the time the analyst returns to the office the recent results have become history and attention is focussed on the next set of earnings and the prospects for the upcoming 6 to 12 months.
It is this sudden switch to looking forward again that usually explains dramatic movements in share prices. If the statement is cautious and downbeat the shares will be marked down. Conversely, they will be marked up on bullish news. It is unusual for a results release to trigger a huge amount of trading because most of the news has already been factored into the price. Moreover, it is common practice now for companies to hold a second briefing in the afternoon with fund managers, at which they might be a little freer with information. Even after that the top executives will probably spend the next week or so having one-on-one meetings with institutions to fill in any gaps in the knowledge. The knowledge base probably moves in favour of the institutions over this short period.
After that, the analyst will update his model and spend some time talking to the company, clearing up details on the last set of figures, but mostly building in assumptions for the next time period. Half the trick in this is trying to judge if the company can achieve what it says it is going to achieve. Companies that have a record of disappointing and embarrassing analysts naturally find it hard to sell their stories. Equally, a company that used to be well regarded, but changes to one that underperforms, can suffer enormously. One has only to think of Marks & Spencer(LSE: MKS) and Rentokil (LSE: RTO) as companies that caused analysts to squirm to see the subsequent effect on valuations.
So when a company releases results that are as forecast don't be surprised if the shares fall, because secretly the market was hoping for better. Equally, don't be shocked if the shares fall after a huge growth in earnings, like those seen from ARM(LSE: ARM) or Admiral(LSE: ADC) this week. That is what the market thought should happen. It is the accompanying statement that is crucial.
Tomorrow we will see results from Glaxo Wellcome(LSE: GLXO) and Rio Tinto (LSE: RIO). One is on a price to earnings ratio (P/E) of 31 and has fallen 16% this year, the other is on a P/E of 25 and has risen 61% this year. Which company will deliver higher earnings? The answer might surprise. The statements from both will be closely scanned for hints about the prospects for the rest of the year and the year after. That is what will drive price movements, not the historic figures.
The total number of messages that have been posted on the UK's Web-based Foolish message boards has now passed 49,000 -- some time in the next 24 hours some lucky Fool will post the 50,000th message. This great Foolish event will be celebrated in our usual Foolish fashion, and we will give a great prize to the person who manages to be number 50,000 (don't expect a huge monetary value!). But be warned, we will also post the message as one of our Posts of the Day, so make it a good one (let's try not to have too many of the 'am I number 50,000' variety -- amusing as they can be)! So -- who will be the lucky Fool? Get posting!
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