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High street drag can't stop FTSE

by Chris Marshall on Jan 09, 2014 at 10:06

High street drag can't stop FTSE

Three familiar high street names, three disappointing Christmas financial updates: Tesco (TSCO.L), Morrison (MRW.L) and Marks & Spencer (MKS.L) all presented the market with sales declines on Thursday morning.

The FTSE 100, up 0.3% to 6,742, was resilient in the face of declines from the two supermarkets, while M&S somehow managed gains even as City scribblers expressed their exasperation at a 2.1% decline in like for like (LFL) sales over three months.

Maybe investors eyed a bargain. ‘The shares look inexpensive from a forward cash flow perspective’, noted Andrew Wade, analyst at Numis, of M&S. But he remains unconvinced: ‘Having posted 10 consecutive quarters of negative GM [general merchandise] LFLs, we remain unconvinced by the crucial piece of the jigsaw – the improvement in trading trend in the general merchandise division.

Morrisons was judged much more harshly, with investors lumping it into the Christmas losers’ column, sending shares down 5.6% to 240p after the group reported a 5.6% decline in like for like sales.

‘This has been a tough trading period for all retailers, but the weakness of these results clearly reveals a fundamental weakness in Morrison’s business model – extending to more we believe than just a lack of exposure to convenience and online, although clearly this is the main issue,’ summed up analysts at Panmure who rate Morrisons a 'sell'.

Tesco didn’t fare much better. Investors greeted a 2.4% like-for-like sales decline by pushing shares down by 1.6% to 323p.

‘The only relief factors for Tesco's shareholders are a held dividend and a share price that trades on a 10.6x EV/EBIT [embedded value / earnings before interest and tax],’ said Cantor Fitzgerald analyst Mike Dennis, who ranks the shares as ‘hold’.

Joining the supermarkets in the sin-bin was RSA Insurance (RSA.L) after a probe by PricewaterhouseCoopers found that an inaccurate financial reporting in the group’s Irish division had been a ‘one off’.

PwC concluded there are no problems with control at RSA, the troubled insurance group which issued three profit warnings last year.

The group has however fired two executives in Ireland for their roles in relation to its Irish losses, it announced.

Eamonn Flanagan, analyst at Shore Capital, said: ‘Today's news is encouraging and confirms what we had suspected, in that fears in the market of a systemic issue within the group were considerably overdone.’

But ‘the capital issue has yet to be addressed’ and it’s not time to buy RSA yet, he added.

RSA shares dropped 2.5% to 98p.

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