Solid earnings do not a solid share price make and Associated British Foods investors have been finding this out in the last couple of weeks. The company announced a 20% gain in earnings for 2016/17, but at the same time warned that lower EU prices would offset any gains it made with high volumes and lower costs in its sugar business.
As a whole, the group says it expects more progress in earnings this year, which makes it surprising then that the Associated British Foods share price has slumped since the earnings announcement on November from 3346 to bounce off 3066 on 10 November. This is a significant drop for a company that saw its share price nudging 3371 only last month.
Associated British Foods share price could give up more
Outside sugar there is plenty of focus on Primark, which analysts seem to obsess over. It was enough for Associated British Foods to say it was reducing the size of three Primark stores in the US to take a lot of the post-earnings shine off this share.
Adjusted earnings per share for Associated British Foods for the year to 6 September was 127.1 pence which beat analysts’ expectations.
The mystery then is why there has been heavy selling, dragging down the Associated British Foods share price? According to one analyst at Investec, it is simply a case of the share price catching up with events. There is a worry that any company with a strong UK retail presence is going to be caught by a potential slowdown in retail sales going into the Christmas period, and we would concur with this.
Primark and the US market
It has been slow progress with the US market. Investors want to see the company diversifying away from the core UK retail business and see the US as a potential area of solid growth.
Neil Wilson, Senior Market Analyst at ETX Capital, says:
Quote: As any artist will tell you, cracking the US is tough. And as far as the US push goes, management says it has learned much and is doing lots of fine tuning. Three stores are set to be reduced in size for efficiency. The British invasion is as a beachhead but little else after two years.
The market is not patient – investors can see that this is all unchanged from the Q3 update from Associated British Foods. Due to the timing of forward contracts and hedges, dollar strength is seen as likely to hit Primark in the first half, and euro strength to undermine it in the second.
The Armchair Trader says:
Here at the Armchair Trader we have big worries about the impact of a weak pound on the global corporate ambitions of some FTSE 100 stocks. Associated British Foods sits firmly in this bracket. This is perfectly illustrated with a weak sterling that is cutting into the profit margin at Primark, which dropped from 11.6% to 10.4% as a result of US dollar input costs. Next year’s UK purchases must also be seen in the light of the weaker GBP/USD rate when they were contracted. The Associated British Foods share price will, in all likelihood, fall some more as further bad news hits the market. However, it is not all doom and gloom, and we would be surprised if it gives up the bulk of the gains achieved in 2017.