It’s been a hell of a week for some of the FTSE 100. Amid a batch of profit warnings and share price collapses, is it time to reassess the market?

Three big profits warnings in a week might have investors rattled, but each can be explained. So does this signal the start of a correction for stocks, or is it just a blip, exaggerated by the time of year?

UK retail: on the rocks?

 

Dixons Carphone stoked fresh fears about the health of the UK retail sector with a profits warning amid a tough mobile phone market and lower earnings from its software division. Investors baulked at the update, with shares falling 46p, or 20% to 180p, although 7.75p, or around three ppts, of that is due to the stock going ex-dividend today as well.

Dixons is now guiding headline profits before tax in the region of £360m-£440m. If we take the mid-point of £400m, it would represent a 20% drop in profits from last year’s £501m. Only a very small portion of that would be down to the disposal of the Spanish business. The biggest hit seems to be caused by EU roaming legislation, which will result in negative one-off adjustments relating to its mobile network debtor of around £10m-£40m, versus a positive contribution to profits of £71m last year. 

In the core retail area, the UK mobile phone market is proving a tough nut in 2017. Consumers are holding onto phones for longer. Brexit matters here – the weak pound exchange rate has made devices more expensive and consumers are less willing to replace old handsets so quickly.

The warning from Dixons came as the CBI reported a decline in retail sales and the worst month for the sector since the Brexit vote.

The lack of a significant upgrade cycle from Apple has played a part and we might expect an improvement when the iPhone 8 is released, which might be towards the end of the year, although the chief executive Seb James isn’t betting the farm on the next Apple device.

Meanwhile, TV sales are not doing so well versus 2016 as the comparable period featured a big football tournament. We can expect this to even out over the next 12 months, however, with the World Cup due in 2018.

Overall revenues are holding up OK – UK & Ireland +1%, with strong growth in the Nordics and Greece helping.

The managed services division (CWS) is doing less well on revenues, which have fallen by a quarter.

In June we noted that CWS continues to grow very quickly, with revenues up 41% and profits nearly doubling to £21m, helped along by contracts with EE and TalkTalk.

CWS also features Honeybee, the tablet sale software being rolled across the Sprint store network in the US. The Honeybee pipeline is growing and Dixons has agreements with outsourcers in France and the UK that may deliver further customers. CWS is an area of growth potential that investors might be overlooking.

But it’s going to take time and today’s update makes that very clear. The big Sprint deal last year won’t be repeated and profits this year are expected to be limited. A move to the software-as-a-service model, away from upfront sales, is likely to result in a higher value, more sustainable business, but this cannot be achieved quickly.

The plunge in the share price left the stock trading a historically low levels versus earnings - a PE ratio below 7 compares with the average of 22.

WPP: a sign of the times?

 

Another warning from WPP sunk this stock. It’s always seen as a bellwether not just for the wider marketing world but for the global economy to a degree. If firms are investing in advertising they are confident of growth and inflation etc.

The WPP results can be seen as a signal that companies, particularly the blue chip fast moving consumer goods groups, are not investing because there is a lot of uncertainty politically and economically.

Like for like net sales are down 0.5% signals that the ad market is contracting. Profits could be 5% lower.

The question is whether this is a cyclical issue for the ad market or something more structural for WPP. And in that sense the amount of digital disruption has people worried. Companies are now spending big with Google and Facebook, less so through the more traditional channels that WPP operates in. Just as well these companies are also WPP customers.

2016 was a record year for WPP and last July was especially strong. WPP seems very cautious indeed given the pickup in growth in the US and Europe.

Subprime worries?

 

Hedge funds that built up short positions in Provident Financial made the right call after another, much bigger, warning has rattled investors and sunk the stock. PFG shares, which were already down 45% since May, tumbled nearly 70% but have since bounced back a touch.

A catastrophic share price drop in a subprime lender – it’s like the last ten years never happened. Is this a Northern Rock moment? Probably not – this is more about management failings than a market-wide issue: rivals are taking market share. Collections have collapsed not because people suddenly can’t afford to repay the money, but because the agents are not there anymore.

The new home credit model isn’t working and drastic action is required. CEO Peter Crook is out and a turnaround is underway already. The previously-announced dividend is being withdrawn and investors shouldn’t expect anything until we see significant improvements.  The 5.5% dividend yield was really the last leg holding the stock up but this key support has now gone.

Provident seems to have run into some IT problems on top of the morale and recruitment issues relating to the restructuring. Execution risks remain and there is no easy way out from this hole. JP Morgan, Provident’s adviser, says the home credit division is now worth zero.

Meanwhile the spectre of an FCA investigation into a bolt-on product offered by Vanquis has many a bit more concerned. This PPI-like product has not been offered for some time but Provident still drives £70m in revenues from the back book. If the FCA goes really hard on this, think PPI claims for the banking sector, then the bill could be a lot higher.

Management will take a long time to regain credibility. This comes just a couple of months after a profits warning off the back of the disruption of moving to the new operating model. It clearly wasn’t going well and, with profits warnings rarely standalone events, there is a touch of inevitably about this.

The performance is abysmal and significantly worse than management ever could have imagined. Collections are running at 57% compared with 90% in 2016, while sales are £9m per week lower than the comparative weeks in 2016.

This blows another hole in the guidance and Provident is now forecasting a net loss of £80m-£120m.

Is this the end? There must be some sense that things cannot get any worse. A review and turnaround is in process. Other areas of the business remain profitable with Vanquis Bank, Moneybarn and Satsuma all still in line with expectations.

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