Easyjet shares stalling on the runway

By Graeme Dickson
Updated: 12:11 EDT, 26 January 2011

The FTSE slipped 59 points since last Wednesday's close, to finish yesterday at 5917 as investors feared that China's high inflation figures and India's 25 basis point interest rate hike will stunt growth.

Last Thursday, the FTSE fell 108 points after figures were released from the National Bureau of Statistics in China, showing inflation from its Consumer Price Index growing at 4.6 per cent.

The mining sector was sent into a tailspin following the news, having been the chief beneficiary of China's growth story over the past five years.

Friday showed a modest bounce, up 28 points to 5896 as some investors shrugged off the inflation news in China and sought solace in good corporate news amongst certain companies trading in the FTSE 350.

Further progress was made in the FTSE 100 on Monday, with the index advancing 47 points to 5943 again more driven by corporate news than economic, albeit the banks were notably weaker following the political problems in Ireland and comments by the Independent Banking Commission about stricter capital rules.

The blue-chip index went into reverse yesterday, falling 26 points to close at 5917, after GDP figures showed a contraction in the economy of 0.5 per cent in the last quarter of 2010 against an expectation of growth by 0.5 per cent.

The general fall over the last week had to be expected, given the overbought nature of the FTSE 100 index since December to mid-January.

In the short-term we still could see a fall possibly towards 5700, albeit I would not be overly confident given a number of bullish forecasts for the equity markets during 2011. On the upside I still expect 6100 to act as a ceiling as consolidation takes place between the upper 5000's/6100 mark.

Easyjet: The company said it will be reviewing its baggage policy

Big mover: How you can profit

The biggest mover in the FTSE 350 over the last week has come from easyJet (EZJ). The stock has fallen over 16 per cent since last Wednesday to close at 380p yesterday.

This is a result of a profits warning issued last Thursday, stating that its fiscal first half loss could double year-on-year due to higher fuel costs, which have increased by 31 per cent over the comparable period.

Another factor easyJet appears to be losing on is ancillary services, such as check-in baggage charges, as more passengers opt for the free cabin baggage only.

The company said it will be reviewing its baggage policy 'to accommodate the needs of consumers in different European markets'.

Poor weather in the UK and in other European destinations meant that the company will take an additional £18 million hit, while industrial action in Spain and France will add an extra £6 million to easyJet's losses.

Major shareholder and founder Stelios Haji-Ioannou questioned the company's strategy in a statement, asking how it can deploy an extra 15 aircraft next winter without losing money, stating that the business is highly seasonal and that it cannot blame the weather each year.

At the moment, it is too early to comment about prospects for the year. I am sure the company will see a string of downgrades over the next few weeks going into 2011, but the fall might be temporarily seen as overdone.

Note that the stock finds it difficult to penetrate above the 200 week moving average of 392p. That said, if forecasts for 2012 come good, the shares are very cheap, trading at just 8 times forecast earnings with a modest 18 per cent net gearing.

Keep an eye on…

Ocado (OCDO), the food delivery service, as the shares rally leading up to its preliminary results on 1 February.

The shares have increased by 79 per cent since 13 October last year, on a mixture of rumours thought to be a combination of short-covering, talk of a bid from Morrisons (MRW), Amazon or even Waitrose, or that a mystery investor from the US is building a stake.

This all seems like high conjecture, given that the company has yet to make a profit, is expected to make a loss of £9.3 million in the forthcoming results and if forecasts prove correct, when it does become profitable during 2011/2012 it will have an average price to earnings ratio of 300.

You might be a fan of the service as I know many are, but that does not necessarily translate into being a fan of the stock which I am certainly not.

Anyone buying Ocado shares up here, must be prepared to stomach big falls if none of the above rumours turn out to be true.

Highlights for the week in the FTSE 350 include:

• Invensys (ISYS) fell 7.78 per cent last Thursday to 329.6p after it revealed orders fell for its rail division.

• Gregg's (GRG), the pastry and snack food chain, slipped 1.5 per cent to 472.5p, despite rumours that a major UK supermarket is making enquiries as to whether to make a bid.

• On Friday the Royal Bank of Scotland (RBS) rallied 6.5 per cent to 44.94p on talk that it might be able to exit the toxic asset scheme, thereby reducing the government's stake in the bank.

• Sugar refiner Tate & Lyle (TATE) nudged up 0.54 per cent to 555p on talk that rival AB Foods (ABF) may make a move for the company.

• On Monday bank note printer De La Rue (DLAR), slumped 15.19 per cent to 695p after it rejected a 935p a share bid from Oberthur, with the latter withdrawing from bidding proceedings.

• Cable & Wireless Worldwide (CW.) picked up three per cent to 72p on talk that another telecoms company is eyeing the company up.

• Yesterday personal goods manufacturer PZ Cussons (PZC) sunk seven per cent to 352.6p despite saying that it will deliver profits in line with expectations as investors fretted about higher raw material prices.

• Maurel & Prom, a French company which has assets in similar locations in Africa to the UK's Soco International (SIA), jumped up on high volume on talk that it is likely to receive an approach from a Chinese suitor. If that turns out to be the case, then Soco is likely to be next. Despite this, the shares fell 2.9 per cent to 359.3p.