The week ahead: Pearson, ASOS

Monday 17 October

Education group Pearson will open the corporate week with its nine-month trading update on Monday, and Panmure Gordon has eagerly upgraded its earnings forecasts ahead of the release.

With the pound crumbling following the EU referendum, analyst Jonathan Helliwell has increased his earnings per share (EPS) estimates by 10% to 57.5p/70.2p/75p in 2016/17/18, reflecting a new foreign exchange rate of $1.23 to the pound. Although the trading backdrop remains challenging, Pearson has found itself with an FX cushion to help it achieve short-term earnings targets.

The group, which sold the Financial Times to Nikkei for £844 million last year, is hoping to generate £800 million operating profit in 2018, which will allow it to maintain the 52p dividend going into the 2019 financial year. Helliwell reckons this FX cushion gives Pearson the room to miss revenue guidance by 8-10%.

With disappointing newsflow coming from Pearson's US peers, investors will want to see that the seasonal third-quarter uplift is bearing fruit. Still, like-for-like group revenue is likely to have fallen 4% in the nine months, using up around 2% of the "cushion". But Helliwell is confident the stock can recover in the near-term and maintains his 'buy' rating and 870p target price, reflecting 4% upside.

"The market's scepticism towards Pearson's three year targets is reflected in the low valuation (14.2x FY16E EPS falling to 10.9x by FY18E, dividend yield of 6.4% pa based on maintained 52p/share)," says Helliwell. "Despite ongoing tough trading, recent FX moves increase the group's ability to deliver on its targets, and we maintain a positive stance on the stock going into next week's update."

Trading Statement

Applied Graphene Materials, Avacta, Bioventix, Lok'n Store, Tristel

AGM/EGM

Clipper Logistics, City of London Investment Group

Tuesday 18 October

Full-year results for ASOS are due on Tuesday and the online fashion retailer is expected to reaffirm its trailblazing reputation.

UBS analyst Adam Cochrane forecasts revenue growth of 26% to £1.4 billion, believing that "ASOS now has a settled 20-25% sales growth algorithm" that allows it to keep investing in the business.

Profit margin will be capped by this reinvestment, but longer-term prospects are better. Cochrane reckons operating profit margin will stick at 4-5%, but maintains his longer-term 7% target.

Shareholders will want evidence that its transformation from a simple brand aggregator to 'the' go-to online fashion platform is working. Comment on Buzzfeed's expose of alleged unfair working conditions is also expected.

Most of all, though, investors want reassurance ASOS is not going to relive the events of three years ago, when ASOS shares doubled in months before bombing 75% the following year. "It's different this time," says Cochrane.

"In our view management now has better operational risk controls and has been more disciplined about its guidance so there is reduced earnings expectations risk.

"At our new 5,500p price target ASOS is only on 2.2x Cal 17 sales versus 2.3x for Amazon – a much more reasonable multiple for similar sales growth." Good news there, then.

Maintaining its 'buy' rating, UBS predicts £62 million of operating profit and earnings per share of 57.5p. The 5,500p target offers just about 5% upside.

Trading Statement

Connect Group, DotDigital, Utilitywise, BP Marsh, Gear4music, Fusionex International, Hays

AGM/EGM

Frontier Developments, Scancell Holdings

Wednesday 19 October

Trading Statement

Softcat, Datatec, U and I Group

AGM/EGM

Monitise, Terra Capital, Hellenic Telecom Industries

Thursday 20 October

Trading Statement

Lombard Risk Management, SEGRO

AGM/EGM

BHP Billiton, Photo-Me International

Friday 21 October

Trading Statement

Schlumberger

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.