Cost cutting programme dent MicroFocus shares

By Graeme Dickson
Updated: 12:17 EDT, 16 February 2011

The FTSE 100 fell just 15 points to 6037 since last Wednesday to yesterday's close, following profit taking from the relief rally that took place on Friday after Mubarak's resignation as the Egyptian president.

Otherwise, the market has been dominated by headlines from corporations and inflation news.

On Thursday Rio Tinto announced that its net profit almost tripled in 2010 to $14.3 billion (£8.87 billion) thanks to soaring commodity prices.

Friday was more euphoric after the market appeared relieved that Mubarak's seemingly stubborn stance finally succumbed to pressure with the president stepping down after 50 years in government.

Additionally consumer confidence figures in the US came in better than expected for the month of February.

Obama's statement on Monday that he intends to reduce the US budget deficit by $1.1 trillion (£683 billion) over the next 10 years seemed to fall on deaf ears with the S&P index rising just seven points to 1329.

Disappointing US retail sales in January caused the market to take cover on Tuesday, while falling commodity prices affected the resource laden FTSE 100.

Yet again the FTSE is still struggling to rise above 6100 and we are increasingly hearing on the business TV channels that people are optimistic about the stock market but just don't trust buying it here and want to see a five to 10 per cent correction before investing.

Time will tell but for now the underlying trend is up and there is no guarantee that a correction will take place at all. Expect support to initially come in at 5800 if the market decides to cool-off.

Big mover: How you can profit

The worst performing stock of the week in the FTSE 350 came from IT solutions company MicroFocus (MCRO) which fell 30.15 per cent to 291p after it announced yesterday that it was embarking on a major cost cutting programme following news that its revenues in the third quarter came in significantly short of expectations.

The software firm will take a restructuring hit of between $14 million (£8.7 million) and $18 million (£11.2 million) in the final quarter of this year as a result.

MicroFocus has pretty much used up all of the cash resources it had in acquisitions over the last 36 months which have clearly not paid off in the short-term.

The company is now marginally in debt but one might hope that the acquisitions will start to pay off at some stage.

The company still expects to generate profit before interest, tax, depreciation and amortisation of around $159 million (£98.7 million) to $167 million (£103.7 million).

Given the company's market capitalisation of just £598 million, these projections make the company look cheap, just be warned that valuations can often get cheaper after the initial warning.

Keep an eye on…

Keep an eye on British Gas owner Centrica (CNA) next week when it is scheduled to release its preliminary results on Thursday 24 February.

The company has recently been in the press after being linked yet again as possible prey for Russian gas giant Gazprom.

For now though all eyes will be on its results in which the market is expecting earnings per share of 24.6p and a full year dividend of 13.53p a share (almost four per cent).

The stock seems good value on 11.68 times forecast 2012 earnings and therefore given potential consolidation prospects, I would be inclined to hold through the forthcoming results.

Highlights for the FTSE 350 over the last week include:

Hargreaves Lansdown (HL.) jumped 4.3 per cent to 570p on Thursday after the investment management company reported an increased pre-tax profit for its first half fiscal 2011 and said it is extremely well placed to build on the momentum that it has generated so far.

On Friday, Ocado Group (OCDO) slumped 10.5 per cent to 255p after the online delivery service confirmed that the department store John Lewis's pension fund, an 11 per cent shareholder, has sold its stake now that the lock-up period following last July's float ended.

Prudential (PRU) rose 6.5p to 724p on rumours it was poised to buy investment management group M&G.

On Monday Exillon Energy (EXI) rallied 15 per cent to 391.6p, after the Russian oil producer announced an upgrade to its estimated reserves.

Yesterday it was Premier Foods (PFD) turn to prosper, up 16.5 per cent to 25.75p after it announced that net debt fell £103 million over the course of the year to £1.261 billion. The company said its debt will be less than £900 million following asset disposals post the reporting period.