When firms report to the market, we have good opportunity to find out whether they are worth an investment.
Today, half-year results are out for communications technology company Spirent Communications (LSE: SPT), oil producer Soco International (LSE: SIA) and financial markets operator London Stock Exchange Group (LSE: LSE).
Plunging profits
Judging by the downward share price action this morning (around 16%), investors don’t much care for Spirent Communications’ interim report. The problem seems to be reduced profitability. Compared to a year ago, adjusted operating profit and earnings per share both plunged around 70%.
The directors expect full-year profits to be “materially below” their expectations. That’s a phrase guaranteed to fill the hardiest of shareholders with dread, and directors don’t tend to use such language lightly.
Nevertheless, a few bright spots grace today’s numbers report. Revenue slipped just 1% and order intake rose more than 4%, suggesting potential for a profit recovery down the road. In fact, the firm thinks the second half of the year will show growth compared to last year and does not anticipate a revenue decline.
Despite a period of change in the firm’s markets affecting profitability, the directors insist that opportunity abounds for Spirent, too, hence their intention to invest in new products and acquisitions expressing confidence in the prospects for the firm. If Spirent’s challenges on profitability prove transient, share price weakness could be a buying opportunity.
Operational progress
In contrast, the shareholders in Soco International received their report today with apparent equanimity as the shares hardly budged.
It seems all about waiting for oil price recovery if Soco’s shares are to find their way to previous highs. Meanwhile, the cash-rich debt-free oil producer continues about its business even though ongoing profits are much reduced these days.
The chief executive reckons the firm’s focus for 2015 is delivery of its H5 development with first oil now expected imminently. Â Such investment for growth places the firm well to take advantage of a higher oil price when, and if, it comes, making today’s reduced share price a potential buying opportunity for those interested in the oil sector.
Highly valued
Over at London Stock Exchange Group, organic and constant currency revenue increased 1% and operating profit by 4%.
The shares have been shooting up for some time, but it’s worth remembering that London Stock Exchange’s operations have a high degree of cyclicality that responds to general macro-economic conditions. Because of that, the current valuation makes me nervous.
At today’s share price of 2625p the forward dividend yield runs at just 1.4% for 2016 and the price-to-earnings ratio at around 21. Meanwhile, City analysts following the firm expect earnings to grow just 9% that year, leaving a lot of room for that rating to reduce, which could be due to a fall in the share price.