Investor/An insider's guide to the market: The most significant piece of economic news released in recent weeks was the first estimate of US GDP growth for the second quarter. Annualised growth was weaker than expected at 2.5 per cent leading to a shift downwards in interest rate expectations.
A majority of opinion now expects the Federal Reserve to leave the Funds rate unchanged at 5.25 per cent when it meets on August 8th. Even if there is an increase of a quarter-point, it is very likely that the accompanying statement will indicate that this would be the last increase for some time.
US markets reacted positively to this data with bond yields declining and equities posting solid gains. The US equity market has also been boosted by a reassuring second-quarter earnings season. With over two-thirds of S&P 500 results now in, earnings growth for the quarter is running at a year-on-year rate of growth of approximately 15 per cent.
Meanwhile this week was a busy for earnings reports on the Irish market, with heavy hitters such as AIB and Ryanair publishing financial results. AIB's first half 2006 results grabbed the headlines as the group announced earnings per share (EPS) of 93.7 cent, up 29 per cent compared with the first half of 2005. This was well ahead of consensus expectations of 86.3 cent.
The key reason for the large size of this positive surprise was an improvement in the provision for bad debts, mainly due to recoveries in the capital markets division of €38 million. However, even without this improvement in non-performing loans, operating profits grew rapidly across all of the company's business divisions. As a result AIB increased its guidance for the full year to EPS growth in excess of 20 per cent. The interim dividend was increased by 10 per cent to 23.5 cent per share.
AIB is now firing on all cylinders. In the Republic loans grew by 33 per cent and deposits were up 34 per cent. Operating profit rose by 20 per cent reflecting the fact that there continues to be gradual erosion in profit margins in the Irish market.
AIB in the UK also did well with operating profits rising by 19 per cent. Poland performed well ahead of expectations with profits rising by 62 per cent. In capital markets' underlying profit growth was also very good, and when non-performing loan recoveries are taken into account, profits rose by 58 per cent.
Not surprisingly the market reacted well to these results, and the strength of AIB's underlying performance should sustain investment interest in the stock.
Ryanair also announced impressive results for its first quarter (April-June 2006). First-quarter EPS rose by 77 per cent year-on-year to 14.9 cent, which compares with the consensus forecast of 12.5 cent.
The comparison with the first quarter of 2005 is flattered by the timing of Easter, which fell in the first quarter this year, but fell in the fourth quarter for fiscal year 2005. Nonetheless, the results reflected strong traffic growth of 25 per cent and an improvement in yields of 12 per cent. Ancillary revenues per passenger grew by 5 per cent and with a big increase in passenger numbers total growth was 31 per cent. Ryanair's legendary cost control was sustained during the quarter with unit costs (excluding fuel) falling by 2 per cent.
Unfortunately, fuel costs continue to rise and the ongoing strength in the oil price makes it very difficult for Ryanair to achieve rapid profit growth. The indications are for a very strong summer quarter but the company is very cautious regarding the winter months.
Capacity is targeted to increase over the winter with 27 aircraft deliveries compared with a net increase of 15 last winter. Ryanair has extended its oil hedge into the October-December quarter at a price of $74 (€57.9) per barrel, which indicates that the company is not budgeting for any early relief on the oil price front.
Caution regarding the fluctuating oil price and uncertainty regarding the winter months is likely to prevent Ryanair's share price from moving substantially higher in response to current strong trading.
The pharmaceutical company Elan announced its second-quarter results on Tuesday, which were slightly ahead of expectations. Elan is in a loss-making situation and the key to its success lies with Tysabri and its Alzheimer's pipeline. With no news regarding Tysabri these results had only a marginal impact on the share price.
Irrespective of the initial share price reaction in the market to the results from these three companies, they unequivocally add to the evidence that corporate profitability is strong and likely to remain strong for the foreseeable future.
