Company earnings pushing on uphill

Rising earnings expectations could be hard to meet as pressures grow on economic growth and consumers appear set increasingly to retrench as personal budgets tighten. Investors need increasingly to look to business models that either rely on faster evolving markets, involve unavoidable spending or where strongly affirmative action has been taken to change operations in a more positive way. 

Hiscox (HSX)  – Hiscox is a Lloyd’s insurance syndicate specialising in catastrophe, SME commercial and specialist/complex personal lines. The operational and risk profile has been overhauled with low margin but more stable ‘retail’ insurance (more general commercial insurance) expanded at the expense of the riskier, volatile, open-ended but potentially higher margin ‘wholesale’ insurance which embraces the likes of hurricane and flood cover. Hiscox has also recently undertaken a wholesale review of its cover and premiums which has helped push up earnings quality. Upgrades feel unlikely as we enter the Atlantic Hurricane season, the period of greatest potential peril for insurers. Nonetheless, the share may have derated too far, missing how much risk has been reduced. 

Midwich (MIDW) – this is a leading distributor of professional (as opposed to retail) audio/visual (AV) products such as displays, unified communications, speakers, input devices, connectivity and control systems. Particularly in display devices, there is a good rate of market growth (around 7 per cent) as product/technology lifecycles shorten and more businesses embrace dynamic rather than static customer interactions. Midwich is an acquisitive business in a still highly fragmented global market allowing four-to-five high value-added bolt-ons to be made each year. Recovering markets and higher manufacturer rebates should combine with high operational gearing, making potentially material upgrades very likely. The risk is that this is already bound up in a fairly chunky rating.

AstraZeneca (AZN) – one of the world’s largest pharmaceutical businesses, AZN has undertaken an impressive volte face in the last five years. From an organisation facing damaging patent expiries, a low growth drug profile and pressured financials, AZN now offers investors longer, safer revenue visibility, well above average earnings per share (EPS) growth, a rising & now affordable dividend and a rapidly improving balance sheet. The driver of this turnaround has been the $39bn acquisition of Alexion in 2020, by far the largest deal the group has made, by bringing it exposure to the high margin ‘orphan’ drug space. Although EPS upgrades appear unlikely for now, the shares still appear good value even after rising by around 20 per cent so far this year.