8 - 14March 2001

Investors Corner

The Market
London shares closed down on Friday, but well off mid-afternoon intra-day lows – prompted by Oracle’s profit warning and a slew of downgrades to computer stocks – as Federal Reserve Chairman Alan Greenspan failed to offer any more indication of future rate cuts. The FTSE 100 index closed 50 points down at 5,858.6, above its early afternoon drop to 5,829.5.
The broader FTSE indices were all lower – with the techMARK 100 index reversing earlier gains in the wake of Nasdaq’s fall. Volume in London was fairly solid, with 1.435 billion shares changing hands in 92,798 transactions, bolstered by good trading in Vodafone and Rolls-Royce.
On Wall Street, the DJIA was down around 55 points while the Nasdaq index was down around 57 points at the close of trade in London. UK blue chips started easier in very thin and slow early trading, failing to gain any benefit from a late technology-led rally by the Nasdaq index the previous night, with another batch of after-hours earnings warnings in New York, and poor performances in Asia offsetting the good news.
However, after the initial mark down, the FTSE 100 index managed to rally as the early morning session progressed, helped by a strong set of full-year results from blue chip engineer Rolls-Royce, which helped brighten the mood in the London market.
But the recovery was fairly limited, with underlying caution remaining – particularly for technology issues – as investors speculated that Nasdaq’s late rally would very likely be undone following the after-hours earnings warnings in the US – notably from software firm Oracle, and hardware group Applied Materials. Having reached a peak at 10.41am, the FTSE 100 index trod a downward path throughout the late morning session and into lunchtime, drifting back as investors focused nervously ahead to Wall Street’s restart.
In the absence of any major economic data, the only real direction was towards concerns about US corporate earnings, and uncertainties over further interest rate cuts – particularly with Fed. chairman Alan Greenspan delivering another congressional testimony. Given the fragile sentiment, UK blue chips soon went spectacularly in to reverse in mid-afternoon trade, hitting the day’s hefty low by 2.37pm, knocked back by a sharply lower opening on Wall Street.
Both the DJIA and the Nasdaq composite index posted big falls in early trades, although each managed to recover from their lows as the morning session unfolded across the Atlantic, digesting the latest words from Alan Greenspan, and some reassuring US data. In his latest testimony of the House Budget Committee, Greenspan once again failed to offer up any hints regarding further US rate cuts, with the Fed. chairman simply repeating that he favours using the growing US budget surplus to pay for tax cuts rather than new government spending initiatives.
Brighter news on the US economy saw the University of Michigan consumer sentiment index rise to a revised 90.6 in the final February report, up from 87.8 in the preliminary reading. The upward revision was bigger than expected, with the consensus forecast for a revised final reading of 88.3. With Wall Street remaining depressed but managing to rally, the FTSE 100 index also managed to hold off its worst levels for the day by the Friday close.
Overall though, the UK blue chip index still ended a dire week in depressing fashion – almost 100 points below the level seen at the close last Friday. Blue chip engineer Rolls-Royce was still the biggest blue chip gainer by the close of trades, supported by forecast-busting full year results. The firm reported an increase in underlying pre-tax profit to £436 million, up from £368 million last time out, although hefty exceptional charges clouded headline figures. Rolls-Royce also unveiled a year-end firm order book of £13.1 billion, up from £11.5 billion at the same stage last year. The group reaffirmed its view that earnings growth should resume in 2002.
In response, Rolls-Royce soared 23 pence higher to 214-1/2. Broker upgrades after reassuring full-year results continued to support BAe Systems, with Deutsche Bank upgrading to “buy” from “hold”, and Schroder Salomon hiking its stance to “outperform” from “neutral”. BAe shares firmed 7-1/4 pence at 317-1/4, with Commerzbank also upgrading it to “hold” from “accumulate”.
Selected technology issues continued to post good gains on the FTSE 100 leaderboard, with Spirent up 36 pence at 417 and Misys 25 pence firmer at 575 – with the group currently hosting a conference in London on their healthcare business – and Logica up 20 pence at 1371.
Mining shares posted good gains in late trades, buoyed by a strengthening of the price of selected metals: Billiton added 5 pence at 312, also following “buy” advice from ABN Amro, while Rio Tinto gained 24 pence at 1299. On the downside, telecom heavyweight Vodafone remained weak at the close, 1-1/2 pence off at 182 on news that Italian utility ENEL is seeking a £1.9 billion reduction in the price it will pay for telecoms group Infostrada. Italian regulators gave conditional approval to the Infostrada deal. C&W shares lost 32-1/2 pence at 685, while Colt Telecom was down 44 pence at 1142 and BT lost 3 at 532.
Reuters
Reuters, the financial services and information group, reported strong financial results for the year ended 31 December 2000 with all divisions experiencing good revenue growth and improving revenue trends. Demand for information products was healthy. Revenue from Trading Solutions recovered well, as expected, from the millennium slowdown. Reuters’ Instinet benefited from good growth in volumes traded on global equity markets and finished the year with record US market share.
In the first year of the business transformation programme, Reuters has laid the foundation for the new internet-based architecture and started to introduce to clients elements of the new functionality. Revenue for the year rose 15 per cent to £3,592 million. The group again demonstrated the strong cash generative nature of its business. In particular Reuters Financial (RF) converted 103 per cent of its divisional operating profit into cash in the year.
About 90 per cent of Reuters Financial’s revenue is derived from subscriptions or other revenues of a similarly recurring nature. Taken as a whole, revenue rose seven per cent to £2,559 million. Divisional operating profit rose by seven per cent to £517 millon at actual rates. On an underlying basis operating profit rose 19 per cent. Within RF, Reuters Information revenue grew by seven per cent in overall terms and eight per cent on an underlying basis. In particular, sales of the US domestic equity product, Reuters Plus, topped 60,000 units in the year. By the end of the year the group had sold more than 27,000 units of the flagship information product, 3000 Xtra, well in excess of targets.
In Reuterspace, revenue rose 50 per cent to £235 million in overall terms, reflecting the benefit of acquisitions made during the year. On an underlying basis, Reuterspace revenue was up 16 per cent. Online media revenue more than doubled, but was partially offset by reduced revenue from television. The Greenhouse Fund contributed £53 million to the Group’s net gains from the disposal of fixed asset investments bringing the cumulative total over four years to £127 million. While an IPO is no longer intended for the Greenhouse Fund, Reuters anticipates bringing in strategic investors.
Instinet’s revenue rose 53 per cent to £804 million in overall terms and 40 per cent on an underlying basis. In the US, underlying revenue was up 34 per cent on strong volumes traded in the over-the-counter market. After a first quarter in which Instinet lost market share as a result of the explosion in retail and day trading activity it recovered market share to account for almost 10 per cent of the combined New York Stock Exchange and Nasdaq trading volumes in the fourth quarter. On an underlying basis, international revenue rose 61 per cent and now accounts for 24 per cent of Instinet’s total.
The overall growth in operating profit at Instinet, at 22 per cent, was slower than the rate of revenue growth, reflecting investment in the development of the fixed income securities platform. Total investment in these two initiatives in 2000 was £66 million. Based on a review of market conditions and an evaluation of alternative strategies, Instinet decided not to proceed with the launch of the retail brokerage offering.
Instead, Instinet plans to offer the service through traditional and online securities brokers and through its wholesale operations. The process of floating a minority stake in Instinet was initiated with a US Securities and Exchange Commission filing last week. The IPO is expected to take place in the first half of the year.
A year ago Reuters announced a programme to invest a total of £500 million to accelerate the migration to an Internet business model supported by web-enabled internal systems and processes. These initiatives have made good progress in their first year although the level of spending, at £139 million, was slightly less than originally estimated. Benefits, both in the form of top line growth and cost savings, are expected to emerge later this year and to accelerate through 2002.
Radianz, Reuters venture with Equant to form a secure extranet for the financial markets, is pushing ahead with the transfer of Reuters network resources. Multex Investor Europe, has made an encouraging start. Factiva, the news database joint venture with Dow Jones, went into profit during the second half. Reuters share of losses from joint ventures and associates totalled £21m in the year and the group expects to continue to invest in these strategically important and fast growth business opportunities.
Reuters’ strategy may have been a little slow in coming. But Reuters’ plans to shift to the internet and embrace technology look perfectly robust despite the change in market sentiment. Not so the proposed Greenhouse Fund flotation and Instinet’s retail product. But Instinet’s flotation is on track and, while competitive threats lurk, a 10 per cent US market share in the fourth quarter is impressive. Market volumes will matter more than values. Although Instinet will be a volatile stock, like Tibco, listing it should make it easier for investors to focus on the all important core business.