Today I am considering the investment case for two Wednesday headline makers.
Motoring higher
Shares in insurance giant Direct Line (LSE: DLG) were dealing marginally higher in midweek business following the release of bubbly financials.
Direct Line advised that gross written premiums advanced 4.2% between January and March, to £777.8m. In particular, the company is benefitting from the recovery in car insurance rates, with gross written premiums at its Motor division leaping 10.5% during the period.
The car segment makes up half of the group’s gross written premiums, and I expect revenues from this sector to keep on rising, also thanks in no small part to Direct Line’s heavy brand investment and exceptional customer retention rates. Indeed, the firm saw total in-force vehicle policies edge 1.7% higher during the first quarter.
Chief executive Paul Geddes commented that
“for the rest of 2016, we will aim to build on these foundations, while keeping a firm control of our costs, and we reiterate our combined operating ratio target of 93% to 95% for ongoing operations.”
And the City certainly expects Direct Line to keep up this solid momentum in the near-term and beyond.
A 7% earnings improvement is pencilled in for 2016, resulting in an attractive P/E rating of 12.8 times. And the multiple moves to 12.2 times for next year thanks to a predicted 5% bottom-line advance.
Meanwhile, income hunters should take serious notice of Direct Line’s improving dividend prospects — the company boasts stonking yields of 5.8% and 6.2% for 2016 and 2017 correspondingly. I believe the insurer should provide stunning shareholder rewards as conditions in its key markets improve.
Risks outweigh rewards?
Resources giant Glencore (LSE: GLEN) also furnished the market with its latest production numbers in midweek business. The market greeted the results with scant enthusiasm, however, and the mining play was last dealing 5% lower from Monday’s close.
As expected, Glencore’s planned production cuts kicked in across all of its major markets. Copper volumes slipped 4% between January and March to 335,000 tonnes due to shuttered production in Africa, while zinc and coal output slumped 28% and 17% respectively during the period.
While an essential step in reducing Glencore’s costs and helping it traverse an environment of low commodity prices, wider production cuts are required across the industry to put metals and energy prices on a solid upward keel.
As it stands, the number crunchers expect Glencore to flip back into the black in 2016 with earnings of 5.2 US cents per share.
But with the company dealing on an elevated P/E rating of 54.9 times — and the company’s core markets still weighted down by vast supply/demand imbalances — I believe there is plenty of space for Glencore’s share price to experience a severe retracement.