Who, what, where and why?

With a plethora of earnings reports out today, the magnitude of numbers and outlook comments that investors have the task of digesting is huge. Here, therefore, I have summarised some of the key events and analyst reactions that are driving the UK markets on this busy Thursday. Share prices were correct as at midday.

FTSE 100 pleasers
BT shares surged 9.7% higher after the telco’s first quarter figures beat consensus at every level, with adjusted earnings coming in at £1.4 billion against £1.3 billion expected. BT also said its cost-cutting programme is on schedule and overall trading was “solid” during the quarter. “The benefit of cost savings is evident,” FinnCap noted following the release, adding that “the augurs are good for a continued focus on cash generation, with net debt of £10.5 billion being £300 million better than expected.” The broker said confidence in the numbers could lead to some mild consensus forecast upgrades, even though the company’s outlook expectations have remained unchanged.

Rolls Royce jumped 6.5% as the market cheered its strong set of first-half numbers. The company beat consensus expectations with earnings before interest, taxation and amortisation (EBITA) rising 8% year-on-year to £445 million on revenues up 17% to £4.9 billion. Morgan Stanley today said the results reinforce its view that Rolls Royce’s full-year guidance is achievable, while Numis Securities said: “Our investment case has been predicated on Rolls’ earnings being much more robust in this downcycle than the market is pricing in, leading to a multiple rerating. This view has been supported by today’s results.”

BSkyB gained 5.4% after surprising on the upside with new customer subscriptions of 124,000 over the fourth quarter—approximately 30% higher than the market had forecast—and a swing to a fiscal year net profit of £259 million versus losses of £127 million in the previous year. Not surprisingly, the television and broadband provider’s decision to hike its dividend by 5% to 17.6% also caught shareholders’ attention. Numis Securities described the results as “very strong operationally and in line financially,” and said it is very encouraged by the excellent operational progress being made by the group.

British American Tobacco ticked up 0.9% after topping consensus forecasts with adjusted earnings per share of 77.3p for the first half, a 25% rise year-on-year, and far exceeding expectations for its price/mix, which increased by around 9% in constant currencies. “Clearly after such a strong set of numbers we would expect consensus earnings for [full-year 2009] to rise materially, perhaps by 5%,” Evolution Securities commented following the results. The broker added that the shares have performed well and “are the consensual long in the sector for good reason.”

Smith & Nephew’s second quarter results were broadly in line with expectations but signs that the prosthetic limb manufacturer’s Earnings Improvement Plan (EIP) is bearing fruit helped push the shares 0.7% higher. Sales came in at the low end of guidance but strong margin expansion across all three of the firm’s divisions, thanks to EIP, fueled a higher-than-expected adjusted EPS of 15.4 US cents.

FTSE 100 disappointers
Reed Elsevier plunged 14.6% as its forecast-beating interim numbers were overshadowed by the publisher’s guidance downgrade. Reed today said it expects EPS to be “under some pressure for the full year and going into next,” having previously indicated that it saw EPS growth in 2009 at constant currencies. The company also confirmed it is undertaking a placing of up to 9.9% of equity to bolster its balance sheet. Following management’s conference call this morning, SNS Securities noted that management expects the share issue to be sufficient to cover its plans going forward and that it is needed to maintain credit ratings. “We are still somewhat puzzled by the argument of the necessity to maintain the credit rating versus share issue,” the broker said, “as liquidity appears not to be an issue.” Meanwhile, analysts at Numis Securities said the combination of placing dilution, higher investment and lower underlying guidance could see its forecasts fall by around 5% for 2009 and perhaps 10% for 2010.

BAE Systems also posted first-half numbers at the top end of estimates but a 30% increase in the size of its pension deficit sent the shares tumbling 4.4% lower. The aerospace and defence group achieved 6% growth in revenues, 3% growth in EBITA and 10% growth in EPS on a like-for-like basis, with strong operating cash flow of £448 million, but the jump in its deficit to more than £3 billion by the end of the first half dragged a dark cloud over the stock. In fact the deficit increase is down to more conservative inflation accounting assumptions but the number itself was enough to spook investors. “The underlying operating business remains extremely robust,” Numis Securities reassured.

Royal Dutch Shell beat consensus by more than 30% with net income pre-exceptionals down 63% year-on-year to US$3.15 billion in the second quarter, but still the shares fell back 0.8% as investors focused on that 63% drop. Furthermore, as Evolution Securities pointed out, the consensus beat was largely on the back of foreign exchange gains and insurance underwriting profits. Another perceived negative was upstream volumes, which fell by 5% year-on-year to 2.9 million barrels of oil equivalent per day, which dragged E&P clean net income down 75% to US$1.44 billion. “Investors are likely to be concerned by the weaker volumes,” an Amsterdam-based trader said, but highlighted that “volumes are relatively old news and are being addressed although not really until 2010-11.” RDS also lifted its quarterly dividend by 5% as expected to US$0.42 per share and said its cost savings programme has already yielded US$0.7 billion in the first half. Evolution expects to raise its full-year 2009 EPS estimate by 6% to reflect today’s results.

FTSE 250 pleasers
Travis Perkins was the top-performing mid-cap with a gain of 9.5% as the market cheered results that were not as bad as feared. “Usually a headline profit decline of 27% does not look good,” Panmure Gordon commented, “but it is far better than we had expected.” Margins have held up relatively well in both the main divisions and there are some cautious signs of stabilising markets, the broker said.

FTSE 250 disappointers
The worst off on the second tier was RPS Group, which shed 8.8% as its cautious outlook attracted more attention than its marginally better-than-forecast interims. Management said today it is not likely that the company will see an early pick up from the subdued position that developed in the second quarter, and also referred to pricing pressure and delays in the private sector and the risk of bad debts. But overall analysts were upbeat on the numbers themselves and reiterated that the group is well positioned for a recovery.