Modest gains suggest market will drift lower in short term

Investor: The traditionally busy September reporting period continues apace on the Irish stock market with reports this week from Grafton, Independent News & Media and Tullow Oil. In general, companies have been performing well, but the strong run in share prices over the past year means that expectations were already high.

This has been reflected in just small price rises for those companies that have performed well, and sharp falls for those that have disappointed.

Kerry Group stands out in this respect and its share price is down by approximately 10 per cent after its results announcement. Kerry reported profit growth in line with forecasts, but investment analysts focused on a modest decline in profit margins that impacted negatively on profit forecasts for the full year and for 2006.

Another company to disappoint the market this week was the industrial holding company DCC. DCC was not reporting results, but it delivered a profit warning because of a sharp downturn in its IT distribution business.

According to the company, there was a very sharp decline in retail consumer expenditure on technology and entertainment products in July and August.

In response to this news, brokers quickly reduced their current year forecasts by 6 per cent and next year's by approximately 9 per cent.

Fortunately for investors in DCC, the company's other divisions are expected to meet expectations. The share price fell by just under 10 per cent on the announcement, eroding most of this year's gains.

Grafton's results earlier this week generally pleased investors, as it announced growth of 22.3 per cent in earnings per share (EPS) for the first half of the year.

The acquisition of Heiton was the key factor in this strong performance, and the proportion of operating profits generated in Ireland is now back to 45 per cent.

This is timely, given there is a significant slowdown in Grafton's UK markets. Although Grafton has been outperforming its peers in the UK, the company cannot remain immune to the UK slowdown.

In contrast, the Irish outlook is positive and in addition, Grafton should continue to reap the benefits of integration synergies from Heiton.

Grafton's share price has been subdued recently due to the slowdown in the UK, and although its results were good, they were not enough to give a big fillip to the share price. Fyffes reported a stellar rise of 43.7 per cent in H1 EPS on the back of an 18 per cent rise in turnover.

Strong banana prices and a shift into continental European markets lay behind this strong performance.

The results included an exceptional charge of €4.3 million relating to its DCC legal case. The Fyffes share price rose modestly on these results, but it had already enjoyed a strong run this year and is now up by approximately 36 per cent year-to-date.

In the short term, further gains are dependent on the outcome of the current review of the EU banana regime.

The date for the introduction of a tariff-only system is January 1st, 2006, although as yet nothing has been agreed between the EU and the Latin American producers.

If agreement cannot be reached, the issue will go back to the World Trade Organisation for arbitration.

In the financials, Irish Life & Permanent reported a solid set of interim results which were broadly in line with market expectations. Operating profit rose by 5 per cent and the dividend was increased by 7 per cent.

The results benefited from a small improvement in profit margins in the life business and an increased contribution from its general insurance associate, Allianz Ireland. In terms of the outlook, the company remains confident of a strong performance in H2 2005.

Overall, Investor is impressed by the underlying business performance of corporate Ireland that emerges from the current results reporting season.

However, the share price reaction to the corporate news does indicate that there may be little upside to share prices, at least in the short term.

Good results have been met with modest share price gains, while any piece of negative information has resulted in quite large price falls of the order of 10 per cent.

This suggests to Investor that the current level of share prices already fully reflect the positive corporate outlook. Therefore, in the absence of any clear positive stimulus, the market could well drift lower in the short term.

Despite positive results from leading Irish stocks, the gains have been modest, and, in the absence of any clear positive stimulus, the market could well drift lower in the short term.