Shares in Sports Direct International (LSE: SPD) are sliding this morning after the company reported half-year profits that came in below expectations.
Profits at the group rose by a quarter in the last six months, despite last year’s figures being boosted by the Fifa World Cup. But the group’s underlying profit figure of £166.4m was lower than analysts had been expecting. Analysts were ready for the company to report underlying profits as high as £172m.
Own goal
After today’s update analysts now expect Sports Direct’s profits to fall by 2% to 3% for the full year, even though headline figures for the past six months showed pre-tax profits increasing 25% from £149.7m to £187.3m.
At the time of writing, Sports Direct’s shares have fallen 10% in early trade and it’s easy to see why. City analysts had been expecting the company to report earnings per share growth of 11% in the year to 30 April 2016. As a result, Sports Direct’s shares were trading at a high growth multiple of 16.1 times forward earnings. However, now earnings are set to fall this year, the market no longer seems willing to pay a high multiple for the company’s shares.
But even after falling nearly 10%, Sports Direct’s shares still look expensive. Based on last year’s earnings figure of 38.9p, at 600p the shares are trading at a historic P/E of around 15. With this being the case, Sports Direct’s shares could have further to fall as the company’s valuation re-adjusts to the group’s slower rate of earnings growth.
Currency concerns
Joining Sports Direct on the loser board is Old Mutual (LSE: OML). Shares in Old Mutual have fallen 5.5% in early trade following the shock move by the South African government to replace its finance minister. The expulsion of the minister sent the country’s currency crashing to a record low of 15.38 rand per dollar on Wednesday. Five years ago there were 6.7 rand to the dollar.
Old Mutual has its roots in South Africa and the company still has a strong presence there via its ownership of Nedbank. Profits at Old Mutual’s South African arm increased 14% during the first half of the year, but a weakening rand will dent the group’s South Africa performance going forward. There’s also the effects a weak rand will have on the country’s economy to consider.
That being said, there’s more to Old Mutual than its South African operations. The group has businesses across Africa and is building a leading retail investment business here in the UK.
Still, 45% of Old Mutual’s first-half adjusted operating profit came from its South African Nedbank subsidiary, while 37% came from the group’s other emerging market operations. And the remaining 18% of adjusted operating profit was from Old Mutual Wealth and institutional asset management.
Income pick
All in all, it’s unlikely that Old Mutual will escape from South Africa’s currency turbulence unscathed. But for income seekers, this could be the perfect time to buy the company’s shares. Old Mutual currently supports a dividend yield of 4.5% and the payout is covered twice by earnings per share.
