Investor/an insider's guide to the market: The current rally in the Irish equity market that began in June was sustained through October with the Iseq Overall index regularly hitting new highs.
The strength of the Irish market was reflective of a generalised rally in global equity markets. Continued strong underlying growth in corporate profits continues to be a key factor underpinning this equity bull market. Third-quarter earnings reports from US companies once again beat analysts' forecasts, with year-on-year earnings per share growth of 17 per cent now looking likely.
The strength of the Irish market was also helped in no small way by the exceptionally strong performances from some of the market's mid-capitalisation stocks. The food sector stands out in this regard, with both the IAWS and the C&C share prices up by approximately 20 per cent over the month. The year to date gain in the C&C share price is now an amazing 140 per cent, and there is yet no sign of the share's remarkable bull run coming to an end.
The key to this performance is the rapid growth of the Magners cider brand in Britain. During the first half of the year, Magners' volume grew threefold and growth in the second half is expected to match this. Magners' market share of the British long alcoholic drink (LAD) category could reach 1.8 per cent by the end of the current financial year and may reach 4 per cent within four years.
To meet the growing demand for its cider brands, C&C is well advanced in its plans to double capacity by 2009 involving a €200 million capital expenditure programme. The recent strong performance from the IAWS share price was due to the positive market reaction to its announcement of the takeover of the US company, Otis. Otis is a leader in the frozen cookie dough market in the US which has been growing at over 5 per cent per annum over the past decade. Otis was established in California in 1977 as a retail cookie store venture. By the late 1990s, it had made a strategic shift to the manufacture and supply of frozen cookie dough to the food service sector. It now has four manufacturing plants in the US.
This acquisition broadens IAWS's product and category scope, while being similar with regard to its technology and business model. The key similarity is that both IAWS and Otis are involved in supplying frozen baked goods to food retail and food service for on-premises baking. As well as being an extremely good strategic fit, this deal is expected to enhance IAWS's earnings per share by over 2 per cent in the coming year. IAWS is acquiring Otis for $561 million (€439.5 million), which is being funded entirely by bank debt. The company's balance sheet is sufficiently strong to cope comfortably with the resultant higher level of gearing.
Another factor that is having a positive influence on global equity markets is a high level of merger and acquisition activity.
In this regard, the Aer Lingus/Ryanair saga continues to rumble on in the background in the Irish market. The market's and the media's attention is likely to refocus on this absorbing battle next week. Ryanair is scheduled to report its second-quarter results on November 6th.
The market is forecasting second-quarter earnings per share growth of about 12 per cent, driven by 22 per cent plus growth in passenger numbers. Ryanair has recently announced new bases at Bremen and Madrid and expansion at both Barcelona-Girona and East Midlands.
It is likely that the company will reiterate that growth opportunities in Europe continue to be very favourable. On the same day, Aer Lingus is scheduled to publish its response to Ryanair's €2.80 share offer. Earlier this week, Aer Lingus announced that traffic in September rose by 6.4 per cent as the airline carried 777,000 passengers.
Short-haul grew by 8.9 per cent while long-haul fell by 9.2 per cent, in part due to the discontinuation of the Orlando route. Aer Lingus also announced increased frequencies on a range of routes from Dublin and Cork, with the addition of six new services starting in summer 2007.
The Aer Lingus share price continues to trade just above €2.80, and it is looking increasingly likely that Ryanair will have to increase its offer price substantially if it is to have any chance of gaining control.
