Last year was a turbulent one for investors in UK equities: but, as ever, shares in some companies skyrocketed while others plummeted. There's more to a business than its share price, but how its shares perform may be more revealing than its sales and profit figures. Their trajectory can encompass everything from a takeover bid to a big deal or contract, currency and commodity price movements, macroeconomic climates and investor sentiment. We've put six of 2014's rockets and bombs under the microscope for exactly that reason.
FTSE 100: Shire
A mooted merger with AbbVie (US:ABBV) boosted Shire's (SHP) shares in 2014: the speciality pharmaceuticals group posted the best return of the FTSE 100, with a gain of 59 per cent. However, takeover talks and market speculation didn't distract Shire from its pursuit of fast, profitable growth. For instance, third-quarter sales of Vyvanse and Lialda - which respectively treat ADHD and gastrointestinal illness - rose more than a fifth, while revenue from its rare disease division surged 30 per cent. The prognosis is excellent, too: analysts at Deutsche Bank expect Shire's upcoming products to generate £4bn by 2018, fuelling compound annual EPS growth of 18 per cent over that period.
Shire's vitality formed the bones of our recent tip (4,515p, 27 Nov 2014). The muscle remains its attractive rating: at 4,564p, its shares trade at 18 times next year's forecast earnings of $3.90, falling to 16 times in 2016. And the flesh is the prospect of another takeover bid, perhaps by Pfizer or another pharmaceutical giant. Investors should pay attention, as we don't expect Shire to sicken anytime soon.
FTSE 100: Tesco
A commitment to value, relentless expansion and innovations such as the Clubcard helped Tesco (TSCO) to become the world's third largest supermarket chain. Its longstanding rivals and discount grocers Aldi and Lidl are threatening its market share, but Tesco's shares fell off the shelf in 2014 for another reason: it overstated its first-half pre-tax profits by £263m. A string of profit warnings, an exodus of executives and an investigation by the Financial Conduct Authority soon followed.
Tesco doesn't expect full-year trading profit to exceed £1.4bn due to pricing pressure, investments in customer service and strained relationships with estranged suppliers. Indeed, analysts think Tesco's second-half profit from its core UK operations could plummet 97 per cent to just £15m, with a margin of just 0.8 per cent. They blame this on Tesco issuing too many vouchers, axed slotting fees amid range reductions and its reduced clout with suppliers following the accounting fiasco. Broker HSBC expects full-year cash profits to fall 40 per cent to £2.92bn, and the loss per share to widen nearly eightfold to 65.6p. Given the stiff industry headwinds, fierce competition and market mistrust, we think Tesco could be cleaning up its aisles for years to come.
FTSE 350: Man Group
Alternative investment manager Man Group (EMG) has risked provoking investors' wrath by sticking to its AHL quantitative strategy, which has delivered three years of annualised losses. But it appears to have made the right call: analysts expect double-digit returns from at least four of its six AHL funds in the year to end-September, which should flow through into higher management and performance fees. Man's faith has been rewarded - its shares outperformed the rest of the FTSE 350 in 2014.
Recent quarterly returns from Man's AHL strategy have been the best in six years. That semblance of a track record should help it to attract new funds from investors. It has also reduced its cost base by 36 per cent since the end of 2011. And Bank of America analysts think share buybacks could boost annual EPS by 12 per cent over the next three years. They expect full-year pre-tax profits to rise a quarter to $372m (£237m), giving EPS of 18¢.
It's difficult to evaluate the potential of Man's AHL strategy. But the group has hedged its bets by acquiring US-based manager Numeric and fund-of-fund credit manager Pine Grover, which broadens its service range and US customer base. Crunch the numbers and, at 144p, Man's shares trade at 13 times forecast earnings and come with a yield of 3.5 per cent, which indicates substantial value to us.
FTSE 350: EnQuest
EnQuest (ENQ) has been one of our more controversial buy tips. The North Sea oil and gas producer has stellar production prospects, but falling oil prices, its abandonment of a well in Malaysia, project delays and plans to invest £500m in its North Sea oil and gas assets conspired to send its shares tumbling in 2014. Although production from its key Alma/Galia project is scheduled to begin in the summer, and most of 2015's production is hedged at $87-$98 a barrel, market sentiment remains leaky.
Group output rose by 19 per cent to 27,567 barrels of oil equivalent per day (boepd) in the 10 months to end-October, and management has forecast between 25,000 and 30,000 for the full year. EnQuest is conducting appraisal drilling at its Kraken development in the North Sea, and it has acquired stakes in Malaysian oilfields and production contracts. Moreover, its focus on underdeveloped North Sea fields could put it in line for future tax breaks. Although Enquest's shares have tanked to 37p since our buy tip (132p, 24 Jul 2014), they trade at a hefty discount to broker Canaccord Genuity's risked valuation of 144p a share and continue to offer value.
AIM 100: Songbird Estates
Shares in Songbird Estates (SBD) doubled in value in 2014 after the Canary Wharf developer fielded two takeover proposals from the Qatar Investment Authority. It rebuffed the latest 350p-a-share offer, citing its adjusted net asset value of 381p a share. Songbird's portfolio climbed in value last year, perhaps in part because of the recent sale of London's 'Gherkin' building, which points to a renewed appetite for big property assets.
Songbird has flown its historical coop of near-bankruptcies and bailouts, and now its investments in top-end property are returning home to roost: first-half net rental and related income rose 15 per cent to £141m. It has also been granted planning permission for a 4.9m sq ft mixed-use development close to Canary Wharf, and the arrival of Crossrail in 2018 should provide a useful tailwind. At 325p, Songbird's shares have surged 180 per cent since our buy tip (116p, 25 Oct 2012). Yet they trade at a discount to the group's adjusted net asset value, and a third takeover bid could be the charm.
AIM 100: blur Group
A series of profit warnings and accounting revisions in April and May sent shares in blur Group (BLUR) tumbling, and they are yet to regain any ground. But the picture is sharpening at the e-service platform owner, which lets companies outsource tasks to contractors and service providers. For instance, German car-hire giant Sixt, food brand Aryzta and construction group Kier recently began using its platform to host promotional videos, streamline procurement and manage costs respectively.
They join a blue-chip clientele - which includes Amazon, Tesco and Argos - that drove a 170 per cent rise in the first-half value of blur's projects from repeat customers. And bookings, a rough measure of the value of new projects, tripled to $16m, compared with about $22m for the whole of 2013. It also ended the period with over $24m in cash, which should see it through to profitability. Broker N+1 Singer expects blur's pre-tax losses to shrink from $10m in 2014 to $700,000 at the end of 2016, giving a loss per share of $1.50. We think blur's rapid growth shows it can successfully disrupt the business services industry, and its impressive customer base gives it credibility and underpins its clear prospects.
