This summer’s company results season has created a lot of uncertainty. In this article I’ll take a look at three companies whose shares I won’t be buying following today’s results.
A falling star?
Interim results from satellite broadband provider Inmarsat (LSE: ISAT) show that the business returned to growth during the second quarter. Revenues rose by 6.1% to $330.4m, while pre-tax profit rose by 41.7% to $76.8m.
The first half as a whole was less impressive. Revenues rose by just 2.1%, while Inmarsat’s operating margin fell by 2% to 30.8%. The group warned this morning that tough conditions in the oil and shipping markets meant that margins remain under pressure.
Although Inmarsat’s net debt of $1,923.9m appears to be within its target range of 3.5 times earnings before interest, tax, depreciation and amortisation (EBITDA), this is quite high. Most businesses target net debt of 1.5-2.5 times EBITDA.
Inmarsat remains a good business and I’m confident trading will recover. But today’s decision to offer shareholders the choice of receiving their dividends in scrip (share) form rather than in cash highlights a risk — the dividend isn’t covered by free cash flow. Although Inmarsat’s 5% forecast yield is attractive, a dividend cut is still possible.
A stumbling turnaround?
Shares in defence engineering firm Cobham (LSE: COB) fell by more than 5% this morning. The group reported a pre-tax loss of £38m for the first half of this year, compared to a £4m profit last year.
Cobham’s adjusted results — on which analysts’ forecasts are based — showed that underlying earnings per share fell to 4.4p during the first half. That’s only about 34% of current forecasts for full-year earnings of 12.9p per share. This means that to meet expectations, Cobham’s second-half profits need to be double those generated so far this year.
The company maintained its guidance this morning and said that performance would be heavily weighted to the second half of 2016. This may be true, but such reassurances are often an early warning that profit forecasts won’t be met.
Cobham’s net debt remains relatively high, at £877m. Given this, my view is that using more than a quarter of June’s £500m rights issue cash to fund this year’s £126m dividend is unwise. Cobham shares don’t look expensive on a P/E of 12, but I’d wait for signs of growth before returning to this stock.
A rare blip for this gold star
African gold miner Randgold Resources (LSE: RRS) rarely does anything to disappoint investors. But the group’s shares fell by 11% this morning after Randgold said that gold production fell by 4% during the second quarter. The shortfall was due to mill downtime at the Tongon mine and a reduction in ore quality at Kibali.
As a result of these challenges, Randgold reported earnings of $1.10 per share for the first half, unchanged from the same period last year. Consensus forecasts are for earnings of $3.16 per share, leaving Randgold with a big deficit to make up during the second half.
The firm expects a strong second half to boost results to “within market guidance”. But with the shares trading on a 2016 forecast P/E of 33 after today’s falls and a yield of less than 1%, Randgold’s valuation is too rich for me.
