This Month's 12 Hottest Blue Chips
LONDON -- There are always winners and losers in the market. Sometimes, a key announcement leads to a big share-price move. This could be a trading statement, or a takeover approach. And sometimes a sector simply moves back into vogue, perhaps as a result of macroecomic developments.
I trawled the FTSE 100 to find the 12 companies that had outperformed most in the last month. As the market starts to favor these companies, could further gains be in the pipeline?
Market Cap (millions of pounds)
British American Tobacco
Associated British Foods
I've selected five for more analysis.
ITV is the television company behind The X Factor, Dancing on Ice, and Coronation Street. As you may have expected, the company's revenue is highly dependent on advertising.
Advertising is a cyclical industry. When companies are confident, they are more likely to spend money. When the economy is growing, companies compete for the same advertising slots, pushing up prices. ITV's revenue was last reported at 1.6 billion pounds. That's significantly up on the 1.3 billion pounds the company raked in for the same period in 2009.
Costs in a business like ITV are normally less variable than revenue, so a small change in sales can have a dramatic impact on profits. ITV is forecast to earn 8.6 pence per share in 2012. That's 39.5% higher than the amount made last year. In 2009, ITV reported EPS of just 2.7 pence.
ARM is one of the U.K.'s few world-class technology businesses. Currently, the company is riding the smartphone and tablet boom.
ARM designs the processors that find their way into devices like the iPad. As these new application areas have emerged, ARM sales have boomed. Revenue of 260 million pounds in 2007 grew to 490 million pounds by 2011. EPS has increased from 2.7 pence to 8.8 pence in just four years. Further profit growth is expected as the operational gearing delivered by design, rather than manufacture, kicks in. EPS is expected to rise to 14.5 pence for 2012. Another 22.5% of EPS growth is expected for 2013.
ARM shares have been rising since the company announced its third-quarter results at the end of October. This showed that the rate of revenue and profit growth had increased from the half-year stage.
3. British American Tobacco
British American Tobacco is owner of the Dunhill, Pall Mall, Kent and Lucky Strike cigarette brands.
Tobacco companies have long been considered some of the most reliable investments. The dedicated (i.e., addicted) customer base is also incredibly brand-loyal: Not only do they keep buying cigarettes, but they insist on the same brand -- often for decades.
This has made BAT into one of the best income shares on the market. The dividend has been rising since 1999. In the last five years, the shareholder payout has increased at an average of 17.8% per annum.
On the earnings side, EPS has been increasing by an average of 10.1% a year for the last five years. Expectations are for another two years of earnings and dividend growth, putting BAT on a 2013 P/E of 14.5 and a yield of 4.5%.
4. Imperial Tobacco
Imperial Tobacco has a similar track record to its rival BAT. The Bristol-based company makes cigarettes under the Gauloises, West, and Davidoff brands. Imperial is also the company behind Golden Virginia.
My concern about tobacco shares is the ongoing regulatory offensive. Tobacco advertising has already been removed from almost every medium in the U.K. Australia recently brought in a new law that will only allow tobacco to be sold in plain packs. The Welsh assembly has recently banned large displays of tobacco in supermarkets. The ban will apply to all stores from 2015.
Despite these headwinds, many expect that Imperial Tobacco will benefit from growth in developing countries. My concern is that anti-tobacco measures in developed markets will have a significant long-term impact on sales.
Still, Imperial trades on 11.7 times the 2013 forecast. That's not particularly demanding.
5. Lloyds Banking
Lloyds Banking is one of the FTSE 100's best-performing shares this year. As the eurozone crisis has calmed, the entire U.K. banking sector has risen. Of the bank shares, Lloyds has been the biggest beneficiary of increased confidence in the industry.
I expect that Lloyds will continue to benefit from improved market sentiment. The key to valuing Lloyds is to estimate the likely size of future impairments. In its last trading statement, the bank confirmed impairments had fallen 40% from the year before. If the U.K. economy can recover and return to sustained growth, impairments losses could narrow dramatically.
In the first nine months of the year, Lloyds made an underlying profit of 1.9 billion pounds. This was after impairments of 4.4 billion pounds but before PPI costs of 2.1 billion pounds.
The question anyone looking at Lloyds needs to ask themselves is: What will the company's long-term profitability be? With its forward P/E of 18.6, the market is saying it will be well-ahead of what Lloyds reports for 2012.
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The article This Month's 12 Hottest Blue Chips originally appeared on Fool.com.
David owns shares in Lloyds Banking but none of the other companies mentioned. The Motley Fool has recommended shares in Burberry. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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