G4S stock popped today, but will it keep rising after next week’s results?
City Index August 7, 2014 9:52 PM
<p>G4S shares are approaching a 3% gain as I write this and have, at times, been the strongest performing stock of the FTSE 100 today […]</p>
G4S shares are approaching a 3% gain as I write this and have, at times, been the strongest performing stock of the FTSE 100 today (7th August) but it’s not altogether clear why.
There has not been any news today to which to attribute the stock’s gain, although recent news flow for the world’s largest security company in revenue terms has been moderately positive.
In mid-July, G4S announced the disposal of its G4S Sweden subsidiary to Sector Alarm Sverige As, a Swedish security group, for SEK438m (roughly £37.4m) including cash and debt.
G4S said the sale was part its active portfolio management programme announced last November, aimed at improving the group’s strategic focus, capital discipline and returns.
This suggested there might be further disposals of assets which are not considered to be essential to G4S’s core global security and outsourcing focus.
An additional indirect influence on the stock may have come from results of its rival Securitas AB, released on Tuesday (5th August) also amongst the largest security groups in the world.
The earnings were poor.
There was an unexpected fall in second-quarter core profit as the Sweden-based group continued to struggle in Spain, even as sales grew more than expected, mainly in the United States.
Securitas makes more than half of its sales in Europe, where a recession stemming from the region’s debt crisis has hit demand in recent years.
Operating profit before amortisation fell to $114.6m from $117.14m a year-ago, lagging a consensus forecast of $120.90m.
Furthermore, Securitas’s CEO Alf Goransson indicated the outlook was weak, with the North American market expected to grow 2% this year, France to be flat and Spain to fall 5%-10%.
Whilst one could reason that bad results for a competitor might be good news for G4S, forecasts of G4S’s half-year results, due out next Wednesday (13th August), are expected to also show the impact of sector pressures. Revenues are forecast at £3.182bn from £3.648bn at the same point a year ago.
Another pressure on top security firms is in the area of dividends.
“G4S dividend policy is to grow dividends in line with underlying earnings growth,” the company says on its website. But its coverage ratio (the number of times the company can afford to make such a pay-out) is modest at best.
Additionally, there is the question of debt: in 2013, G4S recorded a drop in earnings before interest taxes depreciation and amortisation (EBITDA), so its net leverage shot up to 4.6 times from 3.4 times in 2012.
The firm has made some headway, but still has a way to go to progress from a hit on revenues stemming from its controversial handling of the guarding contract for the London Olympic Games in 2012.
So, a nice pop of the shares today, but the underlying picture is still questionable at best
Looking at the shares on a 10-minute basis, it’s clear traders have today been exploiting a thin band between short-term support at 255p and short-term resistance around 257p. Zooming out to a wider-angle picture though, the stock’s overall prospects don’t seem so buoyant.
The high for today at 257.40p represents the best level since late July’s 257.90p.
However, the trend since an unmistakeable bearish hammer on the daily chart on 20th June has been downwards. The stock would need to surpass at least 258.97p to break out of the falling channel it has been in since mid-June.
Eyes on next week’s earnings, then.
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