Baker St, London -- Rising house prices set the tone for the market today after a report was published saying that houses are rising in value at the fastest rate for 11 years. That made the market fret more about the chances of the Bank of England raising interest rates this week and that, in turn, pushed the market lower.
Despite that technology shares had their usual run and a few house builders joined in the fun too. The resignation of Dominic Strauss-Kahn, the French Treasury Minister, was a surprise but didn't faze European markets. They were all down anyway while New York had a better day after yesterday's weakness. Yet another Internet new issue, Akami (Nasdq: AKAM), gained 600%, two days after its IPO.
Overall, London had a weak day and settled half a percent lower.
Helphire (LSE: HHR) was the morning's biggest mover and ended the day with a 30p, (11.3%) gain to 295p. Rather perversely the stock has gone up because a new competitor, Ellen Group, is coming to the OFEX market and is making bullish noises about this business sector.
NXT(LSE: NTX) designer of oh-so-dinky flat panel loud speakers added 37.5p (8.6%) to 475p.
GWR Group (LSE: GWG) rose 16p (3.6%) to 462.5p after announcing a 12% gain in earnings per share (EPS) to 5.7p. This company, the second biggest radio business in the country, is benefiting from a surge of advertising on radio and is preparing for digital radio.
GEC (LSE: GEC) had a great day, storming up 34.5p to 699.5p. Documentation on the restructuring and name change, to Marconi, is hitting investor's desks. The thought of this £18b company becoming the biggest stock in the highly rated Information Technology sector, alongside the likes of ARM (LSE: ARM) and Psion (LSE: PON) is clearly attractive. I mean you can actually deal in this stock.
The stock was also boosted by yesterday's news that it is to buy Nokia's SDH/DWDM division for £46m and use the plant to supply SCI with these thingies. The acronym stands for Synchronous Digital Heirarchy/Dense Wave Division Multiplexing. I have no idea what it means but it sounds seriously sexy.
A late announcement from Sherwood International (LSE: SHC) pushed it shares up 102.5p (16.5%) to 725p, making it the stock of the day. Jumping on the Internet bandwagon it announced the launch of aeos, a new e-commerce based IT solution to enable life, pension and general insurance businesses to be conducted directly over the Internet.
Interim results from Marks & Spencer (LSE: MKS) were awful, but everyone knew they were going to be, but the shares still lost 5p to 278p after being up in early trade. The Breakfast news had a look at the results, very early, today.
Stagecoach(LSE: SGC) has priced the new shares it is issuing to fund its Coach USA acquisition at 154p. The shares fell 15.75p, 8.8%, to 163.75p in early trade
Beleaguered coal miner RJB Mining (LSE: RJB) fell 1.5p to a new low of 40p this morning on press comment about more pit closures.
Yet another IT stock, this time Triad(LSE: TRD), has made a profits warning due to the effect of declining orders this year. In a statement to the stock exchange it said that profits for the first half of this year will be well below last year's. The shares declined 12.5p (4.7%) to 252.5p. This company was discussed only yesterday in our regular Monday Growth Investing slot.
Charter(LSE: CHTR), the over ambitious UK engineer, continued to suffer in the wake of its deal to sell its railway engineering business to management for £194m. The shares fell another 15p (4.8%) to 300p.
High street retailer Arcadia (LSE: AG.) suffered in the wake of the M & S announcement and lost 6.5p (4.2%) to 148p.
One tech share not participating in the euphoria was AEA Technology(LSE: AAT). The shares lost 20p (4.9%) to 387.5p, continuing a trend started in September when they peaked at 490p.
RMC Group (LSE: RMC) came under pressure and fell 21p (2.4%) to 851p after press reports that it was considering a bid for Rugby Group(LSE: RBY), up 4p to 118p. Basically, this whole construction sector seems to be in play and it is likely that within 24 months there will only be 2 or 3 stocks left of the half dozen now in the sector.
Last week I threatened to have a look at the Halifax(LSE: HFX) on its company message board . And today it is exactly 2 years and 5 months since the company joined the market. So now seems as good a time as any to see what they've achieved to date.
As I write the share price sits at 779p. Back in the summer of 1997 the share price opened at 776p. You don't need a calculator to work out that this is not a particularly impressive rate of return. During this time the market as a whole has risen by an annual rate of 13%. The banking sector, as reviewed last week by TMF Essex in the new Sector Dissector has performed marginally better at 13.2%.
So has the Halifax done anything wrong? Whilst it is true to say the share price performance since flotation has been disappointing, most people seem to forget what happened in the six months before. Back in January 1997 the initial value range for the offer was set at 390p to 450p. Being one of the beneficiaries of that offer I was chuffed to see the price rise by some 70% by the time the company was eventually listed. If you have held shares in this business because you were originally a member of the building society perhaps you should look at your overall returns from the start of 1997. It is very Foolish to take as long a time frame as possible.
Why did the price rise so much in the first half of 1997? Was the initial valuation exercise flawed? Perhaps. But the banking sector as a whole underwent a dramatic re-rating around this time. The banking index rose 160% from January 1995 until the time the Halifax floated in June 1997. This primarily stemmed from a shift in the way investors looked at banks. Traditionally, banks were valued in relation to their asset value. These days banks are valued by reference to price earnings ratios and other more sophisticated methods. If we were cynical we would define a sophisticated valuation method as one which values a business more highly. Strangely enough, it is the people selling businesses that tend to lean towards these methods.
When the Halifax floated it was valued at 21 times its historical earnings figures. At the time, that was pricey compared to the rest of the banking sector. Today the situation has reversed. The Halifax has fallen to around 16 times earnings whilst the rest of the sector now sits at over 19 times earnings.
So how does the Halifax compare against the rest of the sector? Let's look at three of the key ratios used in the banking industry. Return on equity is the first. This is simply a measure of what returns the company is generating in relation to the money invested in the business by its shareholders. The Halifax's latest interim figures showed their return on equity was 18.3%, meaning they earned profits of 18.3p for each £1 of investors' money. That's fairly respectable and about middle of the range compared to their competitors.
The second ratio is the interest margin. For the Halifax this is 2.3%. This means that it is lending money at an average rate of 2.3% higher than it is paying its customers on their savings. Again that's not bad. The Halifax's strength lies in its cost to income ratio, our third and last key figure. The Halifax has a ratio of 42% meaning that it costs the company 42p to generate each £1 of income. No other large UK bank can better than figure. About half come in below 50%. The sector's lame duck, National Westminster(LSE: NWB), is well over 60%. That's one of the reasons that it has found itself the subject of a hostile takeover bid from the Bank of Scotland(LSE: BSCT).
The Halifax is able to keep its costs low as it has relatively few branches compared to its rivals. Their management believes that most banks have at least twice as many branches per customer as the Halifax. As competitors would find it hard to strip costs from the Halifax, that may partly explain its low rating. The market does not consider it to be a likely takeover candidate.
Another reason the Halifax's share price has suffered is its reliance on its mortgage business. Currently 65% of profits come from its mortgage book. The remainder comes from treasury, long-term savings products, personal insurance and consumer credit. That remainder is growing a lot faster than the main business and is the area where acquisitions are most likely to occur.
That said the Halifax still has a commanding position in the mortgage market. It accounts for 18% of all mortgages in the UK. Although its share of new mortgages is just 7% with the typical mortgage lasting for 25 years it is going to take a long time for that market share to get eroded. Nevertheless competition is increasing and we are all getting more savvy in relation to our largest single outgoing. The Halifax's own figures demonstrate this. In the last 18 months remortgages as a total of all mortgages provided by the Halifax have soared from 7% to 24%.
As we've already suggested it is the non-mortgage element of the business where the majority of any growth is going to come from. In the last year the Halifax has been extremely busy in this area. We've seen its Sharexpress service, which now offers internet dealing as well, and Halifax Direct, its online banking venture. Perhaps most promising of all is 'greenfield.co'. This is a separate internet banking brand due to be launched in Spring 2000. Jim Spowart, who led Standard's Life highly successful banking operation, has been headhunted to oversee this operation. Under his stewardship, Standard Life managed to secure 18% of the new mortgage market in the first eight months of 1999.
Exactly what form this venture will take is unclear but the Halifax has already stressed that it will not compete purely on price by using loss-leading products to build market share like the Prudential's (LSE: PRU) egg:. Interestingly, the Halifax has also said that they are not looking to reduce their branch numbers. Clearly they want a presence in all the corners of the retail financial services market.
So where do they go from here? They are obviously one of the strongest players in the market with an excellent brand name to boot. They have also demonstrated that they are reacting to the technological revolution that is sweeping the financial industry. The trouble is, so is everyone else and more competitors are entering the market on a daily basis. That just proves how excessive the past returns earned by the industry have been. The Halifax looks as if it will come out a winner. But at what cost?
Are you a Halifax shareholder? Discuss the progress, or not, of your shares on the Halifax message board.
Tomorrow night will be the last Fool social in The Barley Mow on Dorset Street. Fools and their friends are cordially invited to meet other Fools and their friends from 7pm onwards. Detailed directions can be found at this url. Any comments, and reasons why you can't come, can be posted on the daily Fool message board.
