Investor/An investor's guide to the market: Inassessing the prospects for 2007, Investor's view was that it would be another good year for financial markets, with equity markets doing particularly well, but that there could well be substantial volatility. Therefore, the recent fall in the markets and the spike in volatility should not in itself derail the likelihood that 2007 will turn out to be a good year.
However, the suddenness of the fall did come as a shock even though share price falls usually occur over a much more concentrated period of time than price rises.
At times like this there is always the worry that what begins as a "correction" will turn into something more serious.
On balance, Investor's view is that this "correction" will not turn into a bear market.
However, investors will be much more sensitive to market risk for several months and therefore advances in share prices will become even more dependent on economic and business fundamentals.
In this regard investors in the Irish equity market can take heart from company results and trading statements released this week. Kingspan reported earnings per share (eps) growth of 35.2 per cent while the dividend was increased by 42 per cent to 19 cent per share for the year.
This exceptional eps growth was mainly organic, with very strong gains in insulation products where operating profits rose by 36 per cent to € 128 million. Accompanying this strong growth in volumes was an expansion in profit margins from 13.7 per cent to 15.7 per cent.
In the offsite and structural division, Century Homes contributed for a full year (nine months in 2005). Proposed cuts in UK carbon emissions should support demand over the medium to long term.
Kingspan will find it very difficult to match its 2006 performance in 2007. Nevertheless, the outlook is very positive for the year and over the medium term. The group did note increased competition in its product areas and the need for continued innovation to retain its lead.
Paddy Power also reported an excellent set of results this week that were significantly higher than market expectations. Betting shops in Ireland performed very well with operating profit of € 22 million due to higher turnover.
The online division also did better than expected, driven by a strong outturn in the sportsbook.
The company ended the year in a very strong financial position with net cash balances of € 87.1 million. Reflecting the strong underlying cash-flow characteristics of the business, Paddy Power declared a dividend per share of 32.2 cent and announced a share buyback of up to 10 per cent of the issued share capital.
Two of the Irish market's heavyweight stocks - AIB and CRH - also reported this week.
AIB reported underlying profit before tax of € 2.075 billion, which translates into a 25 per cent rise in eps to 182.8 cent per share. This was approximately 3 per cent ahead of consensus forecasts that reflected guidance from the company in December of eps growth of "over 20 per cent".
Strong growth in loans and deposits was maintained reflecting ongoing strong growth in the Irish and British economies. Lending growth was 32 per cent in Ireland, 19 per cent in the UK and 17 per cent in capital markets.
Crucially for shareholders, income growth of 18 per cent outpaced cost growth of 14 per cent. This positive gap, combined with continued strong asset quality, led to the strong growth in bottom line profits.
Building materials group CRH also produced results that were a little ahead of market forecasts. EPS came in at 226.8 cent, 21 per cent up on last year.
Recovery in Europe was a major theme in the second half of the year with strong performances from both the materials and products divisions. In the US, the impact of the large APAC acquisition was evident with total profit growth of 45 per cent.
For shareholders the item that grabbed the headlines was a 33 per cent increase in its full year 2006 dividend. This will lead to an increase in the dividend yield to 2.7 per cent, which brings it into line with the European sector average. The group also signalled that dividend growth would continue to be strong in 2008 and over the medium term.
All of these company results are notable for the very strong rate of growth in profits generated by these companies in 2006, which provides a strong underpinning to share prices. Investor takes even greater comfort from the news that the outlook over the next 12-18 months is very favourable for all of these companies. In most cases brokers have revised up their estimates of profit growth for 2007 and 2008 and this additional growth will eventually feed through into higher share prices.
