26 April - 2 May 2001

Investors Corner

The Market
London shares closed the week’s last session down, but off earlier lows, as investors digested the prospect of stagflation after weaker-than-expected US data, with Wall Street edging back from sharp opening falls. The FTSE 100 index closed down 20.3 points lower at 5,601.5 – with the wider indices now largely trading down, save the Smaller caps. By the close of trade, 1.65 billion shares had changed hands in 123,761 trades. At the time on Wall Street, the DJIA was down 121.03 at 9797.05, while the Nasdaq was down 46.48 points at 1738.22.
Blue chips opened the last session of the week in a buoyant mood after strong gains on Wall Street the previous night, but the initial exuberance was somewhat dissipated as investors’ digested the profit warning from Autonomy the previous night. The early enthusiasm for the market, which had seen leading shares push sharply higher in opening trade, was reversed as the morning progressed, with leading shares moving into negative territory as the Autonomy profits alert sent shudders through the technology sector.
The market sank further at midday, with technology stocks leading the wider market lower as the Autonomy profits alert continued to spook investors – largely on fears that IT spend in Europe may be slowing. Leading shares extended their losses in early afternoon trade after an unexpected fall in US payroll numbers and a higher-than-expected hourly earnings rise raised concerns that the US economy could be moving towards stagflation.
The US figures showed a decline in non-farm payrolls in March of 86,000 – the largest fall since November 1991 and well below economists’ forecasts of a rise of 74,000. The unemployment rate rose to 4.3 from 4.2 per cent in February, its highest rate since July 1999 – but as had been widely expected. Wall Street’s poor performance during its last session, alongside Autonomy’s profits warning – that revenues and earnings will be lower than expected after a major slowdown in European IT spending – rattled sentiment towards technology stocks throughout the day.
Autonomy, the Cambridge-based software group, said it expects first quarter to 31 March revenues to be in the range of $14-15 million, with EPS seen around four cents a share. Analysts had been predicting EPS of five cents a share, based on sales of around $24 million. Goldman Sachs downgraded Autonomy to “market perform” from “market outperform”, cutting forecasts for the second time in two days, as it slashed 2002 EPS estimates to 11 cents from 20 cents. ABN Amro turned outright sellers of the stock this morning, from a prior “reduce”, with Dresdner Kleinwort Wasserstein also moving to “reduce” from “add”.
Autonomy shares led the list of FTSE 250 losers all day, having shed a total of 235 pence to 335. Blue chip software stocks slid in sympathy – all impacted by the Autonomy alert and the warning that European IT spend is slowing. Logica, which saw its earnings estimates cut by UBS Warburg, shed 78 pence to 802, while Sage Group shed 15-1/2 to 234-1/2, CMG shed 42-1/2 to 430-1/2 and Misys shed 42 pence to 415.
ARM Holdings was also hit hard by the news, down 34 pence at 256, though Deutsche Bank and ABN Amro were both highlighting the RISC chip maker’s attractions ahead of the upcoming figures and AGM. Telecoms equipment maker Spirent remained on offer after US peer Agilent warned that Q2 earnings would fall short of estimates after the closing bell on Wall Street. Shares in Spirent shed 25 pence at 335, while Marconi was down 20 at 328. But Vodafone held onto earlier gains, pushing 3-3/4 pence higher to 199-1/2 as players reacted to very positive first quarter earnings news from Sprint.
The news helped to offset the previous day’s subscriber figures, which some players had felt were disappointing, with Vodafone warning that customer subscriber growth would slow. Deutsche Bank, which does most of the business in Vodafone in London, repeated its “strong buy” and 345 pence target, with Schroder Salomon also a fan, repeating its “outperform” advice and 220 pence price target.
Elsewhere among the blue chip risers, media stocks remained in demand, with United Business Media up 26-1/2 at 660, Granada 5 higher at 152, Daily Mail 10 higher at 710, Pearson up 8 at 1205, and BSkyB up 8-1/2 at 780-1/2. However the blue chip risers list was largely dominated by switching into “old economy” stocks, as investors sought out so called “safe-haven” stocks – BP Amoco was a winner – up 4-1/2 at 580 – as ABN Amro highlighted its attractions, while FTSE 100 leader Celltech continued to gain on the back of recent approval for its hyperactivity drug; its shares were up 16 at 1184.
Meanwhile, Canary Wharf was 5 pence higher at 532, Centrica gained 3-1/4 at 237-3/4 and Abbey National firmed 15 at 1145. But on the downside, National Grid shed 10 pence at 559, after Dresdner Kleinwort Wasserstein warned of its exposure to Energis – advising the stock a “hold” nevertheless. Second line fallers included chip maker Arc International, down 9-1/2 at 88, Thus down 2-1/4 at 43-1/2, and Morse – 20 lower at 310. Bookham slid 17 at 300 after the Agilent warning, while Emblaze Systems – 14-1/2 lower at 315-1/2 – was hit by the general caution towards software stocks after the Autonomy alert.
SMG was also a loser, shedding 14 to 187-1/2 after the media group revealed that trading in its television operations is currently down approximately 9 per cent on the first quarter of 2000 and warning that the first six months of this year will be challenging. London Bridge Software, however gained 10 to 202-1/2, bucking the technology sector and moving into positive territory.
Selected “old economy” stocks moved into focus on the Mid Cap leaders board. No-frills airline Easyjet attracted fresh interest after strong March passenger numbers – its shares were 12-1/2 higher at 393-1/2. George Wimpey rose 12 to 194 as Merrill Lynch repeated its “accumulate” stance and Morrison Supermarkets gained 10 to 210, boosted by hopes of imminent FTSE 100 entry when Sema leaves the index after the Schlumberger takeover. DFS shares were 10 higher at 437-1/2 after UBS Warburg raised its price target for the group to 440 from 370 and reiterated its “hold” recommendation.

Diageo
Diageo, the drinks, food and burger restaurants group, in the third successive results presentation has delivered double digit organic operating profit growth, driven by strong performance in its premium drinks business. The momentum underlying these results has continued into the new calendar year and the Company therefore continues to look forward to the future with confidence.
In Diageo’s Premium Drinks business, organic volume growth was three per cent comprising growth in spirits of three per cent, in beer of two per cent and a decline in wine of nine per cent. Net sales value of the Johnnie Walker brand grew six percentage points more than the three per cent growth in volume as a result of price increases and mix improvement. While volume of Johnnie Walker Red Label was constant, focus on Johnnie Walker Black Label, with marketing up nearly 30 per cent, resulted in further strong growth with volume up 11 per cent.
Guinness volume was up three per cent, driven by strong volume growth in the United States. The brand continued to grow in all regions except Europe, where the decline in the beer market in Ireland continued to impact the performance of the brand.
Meanwhile, the performance of Smirnoff was very strong. Volume was up five per cent and net sales value grew nearly 40 per cent. This increase in net sales value was in part due to the price repositioning of the brand in the United States, which helped to generate a five per cent increase in net sales value despite a decline in volume. In addition, the successful expansion of Smirnoff Ice contributed to the growth in net sales value with sales nearly 0.6 million equivalent cases above the comparable period last year.
Volume of J&B was up four per cent driven principally by continued strong growth in Spain, while Baileys volume was up eight per cent. In the United States and Great Britain, its biggest markets, it continued to grow steadily with volume up three per cent and six per cent, respectively. Volume of Cuervo in the United States, which accounts for approximately 85 per cent of the brand’s total volume, declined by five per cent due to price increases implemented to reflect the rise in prices.
Tanqueray performed strongly in the period. Volume was up five per cent and net sales value grew 12 per cent as a result of price increases in most markets and the very successful launch of Tanqueray No. Ten in the United States. Malibu’s excellent performance in many markets, with total volume up 21 per cent and net sales value up 19 per cent was the result of a 30 per cent increase in marketing investment. Wine volume declined by 9 per cent but strong growth of Beaulieu Vineyard wines improved the mix and contribution after marketing increased by six per cent.
In Diageo’s Quick Service Restaurants, worldwide system sales were flat as a five per cent increase in restaurant numbers since 31 December 1999 offset a six per cent decline in comparable restaurant sales. In the six months ended 31 December 2000, 306 new restaurants were opened, over 60 per cent of them outside the United States. One hundred and twenty-two restaurants were closed giving a net increase of 184 restaurants since 30 June 2000, of which 33 were in the United States.
Worldwide comparable restaurant sales declined six per cent, with comparable sales in the United States down seven per cent. Reported operating profit fell by £6m to £99m. The decline in operating profit reflects a decline in North America partially offset by continued strong performance in the International business. In North America system sales were down four per cent which led to a 12 per cent decline in operating profit.
In Packaged Food, Pillsbury returned to profitable growth with turnover up two per cent and operating profit up 11 per cent. The results in the six months ended 31 December 2000 show that the strategic reorganisation and marketing changes made in March 2000 have begun to be successful and this business has returned to its long-term trend of profitable growth. Turnover and operating profit growth resulted from improved performance in Pillsbury North America and International. Growth in profit was achieved as marketing investment increased as a percentage of sales, laying the ground for future growth.
Above all, the premium drinks market is expected to continue to perform strongly and this is expected to drive the achievement of overall growth targets for the full year. In Guinness UDV, the global priority brands, which were the main driver of growth in the first half, have continued to grow in line with expectations. The company is excited by the opportunity which the national launch of Smirnoff Ice in the Unites States provides, building, as it does, on the success of the brand in other markets around the world and in test markets in the United States.
As a result of the strong figures, Goldman Sachs said it is upgrading its full year 2002 EPS estimates by four per cent, and the year after number by 3.9 per cent. The new forecasts reflect an underlying upgrade to its forecasts for UDV, supported by currency benefits, and an increased contribution from Seagram and the General Mills/Pillsbury business. This will be offset, however, by decreasing profits from its Burger King business – assuming that the current like-for-like sales decline in the US cannot be “substantially arrested”, the broker added. Turning to the figures themselves, Goldman Sachs said the growth from Diageo’s North American and Asia Pacific spirits businesses was better-than-expected due to strong volumes and prices, as well as continued cost savings.