Baker Street, London -- The largest flotation ever buoyed markets around the world today. The initial public offering, or IPO, of United Parcel Services (NYSE: UPS), more commonly known as UPS, saw 109.4m new shares issued at $50 each. The stock immediately rose $15 to $65, valuing the logistics group at a massive $80b or thereabouts.
This allowed the Nasdaq Composite Index to recover its composure after pausing for breath last night. The tech-heavy index has enjoyed seven consecutive rises. This has lifted it above the 3,000 level into record territory. Yesterday though the Nasdaq closed down 0.6%. This afternoon however, everything was back to normal and New York surged strongly ahead.
This positive mood translated to London, where nervous dealers had been twiddling their thumbs for much of the day. By the end of the session the blue chip index was just back in positive territory helped by healthy oil prices and another bout of telecom fever.
Two stocks, which have epitomised the crazy technological frenzy descending on this pre-millennial market, continued to soar into the stratosphere today. One is valued at 60 times historic sales. Another is now worth nearly 24 times its turnover last year. Both have risen almost 200% over the past year. Incredibly both went up another 10% today to hit new record 52-week highs. No solid news was apparent from either company. This record is quite staggering considering both are also recent entrants to the FTSE 100 blue chip index as well. This illogical reach for the heavens seems to show a market on its knees, reluctant to let go of the few budding and sizeable technology prospects listed in London. Thus the tightly held stocks continue to spiral up in the sky.
Can you guess which companies I am referring to? Yes the first is Colt Telecom(LSE: CTM), worth 60 times sales, which rose a further 214p, or 11%, to 2162p. This happened after several brokers put out bullish notes following yesterday's third quarter figures. The second fairy tale stock is accountancy software developer Sage (LSE: SGE), which jumped 355p, or 10.1%, to 3855p. Nobody seems to care that it's worth 125 times last year's earnings.
These two performances put everybody else in the shade. Fellow IT services group Sema (LSE: SEM) was the nearest blue chip challenger, rising 41p, or 4.5%, to 944.5p.
More traditional telecom provider BT (LSE: BT.A) was also up, being 31p, or 2.8%, ahead at 1147p by the close of play. Top of the charts though was PNC Tele.com(LSE: PTC). Investors warmed to the group's buzzing name, pushing the shares up 45.5p, or 26%, to 220.5p.
Some out of favour sectors leaped into the spotlight during early trading. Oil stock Shell (LSE: SHEL) rose 17p, or 3.7%, to 479p on hopes that the price of crude oil would pick up soon as well. Other oil companies also recovered in line with this sentiment. British Borneo(LSE: BBOR) soared 16.5p, or 10.5%, to 174p. Investors in Enterprise Oil (LSE: ETP) were enriched as the shares went up 33p, or 7.1%, to 282.5p. At the same time Lasmo (LSE: LSMR) was lifted 9.3p, or 7.1%, to 139.25p.
It seems unfair on a day when two stocks valued at 24 times and 60 times sales respectively both went up by 10% or more that one which is worth just a tenth of its annual turnover cascaded nearly 20%. Considering the company has already fallen 77% this year that the market should inflict more cruelty on such a defeated beast is plain horrible. However, the vulnerable animal resides in the most troubled sector: food retailing. Supermarket chain Somerfield (LSE: SOF) said that profits before tax would be at the low end of expectations if its declining sales trend continued. This statement spooked investors, who marked the stock down viciously. The shares fell a staggering 22.25p, or 19.1%, to 94p.
Scottish Power's (LSE: SPW) telecom subsidiary Thus was today priced at 310p. This values the company at £2.2b. Only two weeks ago when the flotation was first announced, the indicative price was thought to be only 235p. The shares were changing hands in the grey market for 335p by the end of the day, 25p, or 8.1%, higher than at the start of trading. But conversely the shares of Scottish Power, the denuded parent, shed 20.5p, or 3.5%, to 566.5p.
Lottery ticket producer and Camelot shareholder De La Rue(LSE: DLAR) dropped 27p, or 7.5%, to 735p as political squabbles about the running of the gambler continued.
Following yesterday's cautious statement about earnings Business Post(LSE: BPG) fell a further 52.5p, or 12%, to 382.5p.
This morning some of the UK's tech stocks followed this American lead and moved down a little. For example Minorplanet (LSE: MPS), the maker of a vehicle tracking system, fell 31.5p, or 9.7%, to 293.5p despite reporting, in final results released today, a doubling of sales. These figures are covered in the Breakfast Fool. Rival telemetric in-car information provider Trafficmaster (LSE: TFC) rose 40p, or 7.1%, to 605p.
Despite the wild swings reported today, there seemed to be little reaction to the steady results reported by such high calibre companies as British Energy (LSE: BGY) and Commercial and General Union (LSE: CGU). Cable & Wireless(LSE: CW.), down 18.5p, or 2.7%, to 665.5p, also released figures. These are covered in today's lunchbox.
Bournemouth, Dorset -- Reading Monday's Foolish Lunchbox by Rob Davies (TMF Essex), penned from one of his various apparent haunts in that eponymous county, I got to thinking about investing in airlines. It is a subject I have pondered a number of times in the past. Well, to tell the truth, the question I have really pondered is "Why would anyone in their right mind invest in an airline?" It brings to mind the famous quote attributed to Richard Branson in response to being asked how you become a millionaire -- "Become a billionaire and buy an airline."
As Rob pointed out on Monday, the recent results from British Airways(LSE: BAY) were awful, showing a massive fall in operating profits of over 55%. British Airways' troubles are put down to overcapacity, but is that the whole story? If it is, how did it come about? And what does it mean for investors?
Let's think about the airline industry in general, and consider reasons why it might pay to be wary of investing in it. Everyone has their own investing style, of course, but for me to invest in a company, I want to see a number of things. I don't insist on any one company exhibiting all of these characteristics, but the more the merrier.
Firstly, I like to see credible predictions of strong sustainable organic growth in earnings. That usually means an expanding industry, or one in which the competition is weak. I certainly don't see any airlines in such a position.
I like companies operating in markets that command high margins, and high margins can come from a number of directions. A shortage of supply, or a developing industry in which demand is growing strongly, both point to high margins. Lack of competitors helps too. None of these things exist in the airlines industry. There is too much capacity, not too little, demand may be growing slowly in the long term, but it has been a bit stagnant lately, and there is enormous competition these days. In fact, BA's operating margin came in at a measly 4.8% this year. Not a high margin industry then.
Another thing I look for is some sort of differentiation between my chosen company and its competition. Does it have a demonstrably better product or service? Is it the clear leader in its field? Would I automatically choose its products in preference to others? To earn more money than the competition, you have to be doing something better. But airlines don't offer much in the way of differentiation. I've flown a lot over the years, and with a few memorable exceptions, it is hard to remember which airline I used for which trip. They're just planes, and you get on when you depart and off again when you arrive.
That lack of differentiation illustrates a major characteristic of a low margin industry, in the way companies in it compete -- on price alone. Let's face it, when we are buying an air ticket, how many of us really look further than the amount of the folding stuff we have to cough up? Personally, I'll pay a little bit more for an airline that I like over one that I don't like, but not very much more. In real terms too, air tickets have been coming down in price for years, and the boom in Internet retail means that just about anyone can get access to cheap fares directly instead of going to local travel agents (who were often effectively tied to specific airlines in the past).
It could be said that some airlines have had a few good years by competing on lack of service. In the USA, for example, SouthwestAirlines(NYSE: LUV) have been successful with their no-frills low cost approach, but that still comes down to competing on price in the end. And it's an easy act to copy.
Where did the over capacity come from, and why is it starting to hurt so much now? There may be a lot of reasons, but the one that strikes me is the gradual deregulation of the industry, the move towards "Open Skies" policies, and the competition that it encourages. For decades, the state controlled national airlines were protected from the real market by having the ability to adjust air fares to suit themselves. Over capacity didn't really count for much, because market efficiency wasn't the driving force behind pricing policy. It didn't really matter if there were lots of empty seats. I can remember flying in half-empty planes in the past, but it's an experience that is becoming much rarer -- it just isn't profitable in a competitive market.
So what will happen to the industry in the future? What so often happens in other sectors when they are faced with over capacity and lots of competition is that takeovers and mergers start to pop out of the woodwork. And we are seeing similar consolidation in the airline business too. It may not take the form of outright takeovers, but the growth of worldwide alliances has similar effects -- synergistic cost savings, better distribution of capacity, easier and cheaper global marketing amongst other benefits. And it reduces competition too.
And if that isn't enough, as well as having little pricing control over their sales, airlines have no pricing control over their consumables either. They have to pay the going rate for oil, and they burn oceans of the stuff. High oil prices are unpredictable, and they will hurt. A lot.
I, for one, think it will be quite a while before we see a properly shaken down, efficient, fully competitive airline industry. My own money's elsewhere, and will probably stay there.
Well, those are a few of my thoughts on the airline industry. Any comments, particularly from any airline bulls out there, let's hear them on the Daily Fool message board. And there's a competition too -- who can tell me where Southwest got their "LUV" ticker from? No prizes though, it's just for fun.
"Don't Californiate us," said Tadg O'Sullivan, representative of an Irish pub landlords association. "The Irish public will never forgive you." O'Sullivan was speaking after a group of Irish MPs got together yesterday to propose a ban on smoking in public places. Irish publicans fear their businesses could be hit horribly by the draconian measure.
O'Sullivan even suggested that "If the government is so concerned about the damage done to all of us, they really should ban cigarettes altogether -- but they won't because of the tax revenues they would lose." If landlords did find themselves looking for work, they could always leave the Emerald Isle and come over to London to staff the many Irish pubs run by British brewers like Whitbread (LSE: WTB), which have proliferated recently.
Raise a glass (and light a fag) with us over on the Daily Fool message board if you want to have a chinwag about this or any other topic.
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