Aviva (LSE: AV), Smith & Nephew (LSE: SN) and Low & Bonar (LSE: LWB) all released third-quarter trading updates today, but the market reaction to the figures was quite mixed.
What do today’s results mean for investors — and are the shares a buy?
Aviva
Aviva shareholders are likely to be reassured by today’s third-quarter results. Compared to the same period last year, the value of new life insurance business rose by 25% to £823m. In general insurance, the firm’s combined ratio (the proportion of premiums paid out in claims) fell from 95.9% to 94%.
The acquisition of Friends Life has now completed and the firms’ operations have been combined. Today’s update reports cost savings to date of £91m, of a targeted £225m.
Aviva’s share price hasn’t reflected its operational progress over the last six months. Aviva shares have fallen by 16% since hitting a five-year high of 578p in March. In my view, long-term shareholders should use this as a buying opportunity.
Aviva looks good value to me on a forecast P/E of 10 and a prospective yield of 4.3%.
Smith & Nephew
Shares in Smith & Nephew slid to the bottom of the FTSE 100 this morning, falling by as much as 6% after the firm’s third-quarter trading report was published.
Why? Although Smith’s sales rose by 4% on an underlying basis, reported revenues were hit badly by currency effects and were down by 4% during the third quarter.
However, despite currency headwinds, Smith & Nephew expects trading profit margins to improve this year. That’s important, in my view, as the group’s operating margin has slipped in recent years, from 23% in 2010 to just 16% in 2014.
The firm also announced the $275m acquisition of Blue Belt Technologies this morning. Blue Belt specialises in robot-assisted surgery, which Smith & Nephew believes could be a future growth area.
Is Smith & Nephew a buy? The shares trade on a 2015 forecast P/E of 20 and offer a prospective yield of just 1.8%. A fair amount of growth is priced into the stock, but the firm has historically delivered on this promise.
Low & Bonar
This morning’s trading update from industrial textile and fabrics group Low & Bonar was short and sounded reassuring. The group confirmed that results are expected to meet expectations this year.
On the face of it, Low & Bonar shares look quite cheap. They currently trade on just 11 times 2015 forecast earnings and offer a 4.3% dividend yield. However, this is a cyclical business that should currently be enjoying strong trading and good cash generation. This isn’t happening.
Low & Bonar’s dividend hasn’t been covered by free cash flow since 2012. Net debt rose from £88m to £102.4m last year, leaving net gearing at 60%.
My view is that at this point in the economic cycle, net debt should be much lower. The dividend should probably be cut to help repay debt. I don’t see any reason to buy.