The Weekly Wrap: Recession, Earnings and M&A

Holly Cook: Welcome to the Weekly Wrap. We've got five items for you today. We're going to be starting off with the British Double-Dip recession and then we've got four company news items for you. We're going to take a look at Unilever, AstraZeneca, Vodafone, and finish off with RBS.

So, Alanna, I guess, we should start with the economics.

Alanna Petroff: Definitely and obviously, we all heard that the numbers weren't very good this week.

Cook: Right. So, we already knew for the last three months of 2011, that the economy had shrunk at rate of 0.3%. Now, we've had the estimate that came in this week that the first three months of 2012, we've had another contraction 0.2% this time. So, those two consecutive quarters of contraction that officially makes it a recession, but I don't think we should be too concerned, because we were actually expecting something along these lines.

In fact, we talked about it in last week's Weekly Wrap. We were saying perhaps 0.1%, 0.2% contraction, it's come on at 0.2%. In fact, when we've been talking to the investment community this week as well, they're also relatively sanguine about it. In fact, when we spoke to Paul Mumford, who is a Senior Investment Manager at Cavendish Asset Management, he had this to say. “While hardly good news, I very much doubt the slight contraction revealed today heralds a double-dip in any real, meaningful sense. Company results have on the whole been reasonable to good, and don't reflect a double-dip scenario.”

So, that's quite encouraging to hear. He is essentially saying that the economy might be struggling a bit, but actually company health isn't that bad.

Petroff: Actually that segue is quite nicely into the company earnings that we saw this week. We had quite a bit of good news but then also some bad.

Cook: Let's start with the good.

Petroff: Yes, I think so. So, the good news is that Unilever reported results that were very good, beat expectations and the share price rose on Thursday after it reported. They saw roughly 8% growth in sales which was very good. They saw very nice growth in emerging markets and decent growth in the developed markets as well.

Cook: So, this could potentially be an opportunity for an investor who is looking to tap into emerging growth, but feels much more comfortable investing in a developed market. This is the kind of company that allows him to do that.

Petroff: Definitely, I'm constantly speaking with people who are professional investors and they are saying that if you want to access emerging markets, generally the best way to do it is through a company that has revenue streams in emerging markets, but is based in a developed market, such as the UK.

Cook: Okay, so that’s the good news. Why don’t you give the bad news?

Petroff: The bad news is that AstraZeneca also reported on Thursday and the results were not good. Now people were expecting profit to fall, but it fell by far more than expected. Investors are not happy right now with the direction the company is taking generally, and the CEO stepped down. So, the CFO has now taken over that position and people are quite nervous about the company.

Cook: Right, no one really likes uncertainty. You want to know that the company you’re invested in has a leader, has somebody with long-term plans. When you hear that somebody is leaving, that’s always going to be worrying news.

Petroff: Yes, definitely. So, the share price did fall on Thursday after that announcement.

Cook: One thing that we do know that investors do like is M&A. It’s always a bit of excitement. Tell us about Vodafone.

Petroff: Well Vodafone said this week that they planned to buy Cable & Wireless Worldwide. I spoke with our Morningstar analyst who covers this, Allan Nichols, and here is what he had to say.

Allan Nichols: I think Vodafone’s purchase of Cable & Wireless Worldwide is a great deal. The UKis the one area in Western Europe where Vodafone has not had a fixed-line business, and they picked that up. Cable & Wireless has the second largest fixed-line business network after BT. They will be able to move a lot of their own business onto that network, save cost that they’ve been spending paying BT. They also pick up some enterprise customers which is an area they have been focusing on and they also pick up stakes in 69 undersea cables. And I think they got it at a great price.

Petroff: Allan also said that if you are looking to buy Vodafone right now, well yes, it has good yields and yes it is actually being slightly undervalued by the market in his opinion. But this isn't necessarily the right time to buy. He thinks shares are only undervalued right now by about 10% so this isn't quite fire-sale prices.

Cook: That's a good tip. Okay, let's move on to our final item then, this is RBS, it's a bank though you may think you don't own, but of course you are a British tax payer, actually you do.

Petroff: Yes, everybody own RBS and so this would be interesting to everyone. They are proposing to combine their shares. What I mean is, if you have 10 shares in RBS, what they want to do is combine all the shares into one.

Cook: So for those jargon-lovers, this is a reverse stock split, right?

Petroff: Yes, exactly. Now, this doesn't mean anything for the value of the company or the value of your holdings. You take 10 shares that are worth, let's say, 20 pence each, and you combine them into one share worth 200 pence. It's really just cosmetic, because I think from the company's perspective it's most nicer to say that their shares are worth 200 pence instead of 20.

Cook: Right, so for those investors who see a change in that portfolio, unfortunately they are not suddenly richer, it's just balancing the books really.

Petroff: Yes, so be warned if this happens. They are going to have the vote in May to see whether they can put this proposal through, if shareholders vote yes, this is okay, this is going to happen in June.

Cook: Okay. Well, thanks very much Alanna. That is something for us to watch out for whether you own RBS directly or indirectly. Thanks again for watching and we'll join you again next week.