Austerity measures impact defence firm

By GRAEME DICKSON
Updated: 12:22 EST, 4 May 2011

Government austerity measures in the UK and in the US are likely to have an impact on companies who rely on large contracts from government institutions, which may have given rise to the dead cross seen in the shares of QinetiQ Group (QQ.) a few months back:

QinetiQ advises customers in the global aerospace, defence and security markets including the Ministry of Defence in the UK and Department of Defence in the US.

As such we do not know the extent these fiscal measures will have on Qinetic, but the £799 million company has managed to reduce its large net debt of £452 million to £294 million by the end of December 2010, partly thanks to disposals and partly to do with the withdrawal of paying dividends until the net debt is significantly reduced.

At this stage, the company has openly stated that it expects to meet market expectations, which the consensus runs at 14.55p per share that implies a price to earnings ratio of just 8.3.

This is good value and the net debt reduction will have a serious negating effect on the idea of selling this stock.

However, the dead cross and the fact that it will be a long time before the US and the UK extricates itself from the debt quagmire they have found themselves in, will weigh on the shares for some time to come.

The stock has made a brief bounce to 121p after slipping further to 115p a few days ago and this might be a better time to sell. If the stock closes above 135p, I would be in favour of cutting any short position, while support should be seen at 95-100p.

Update

Inchcape (INCH) – suggested to sell at 358.9p, the stock closed yesterday at 364.1p. Sit tight for now – if it closes above 415p, cut the position.

Smith & Nephew (SN.) – suggested to sell at 676.5p, the stock closed yesterday at 662p – the stock has acted particularly weak given the broader market. Lower the stop based on a close above 700p.

Carpetright (CPR) – suggested to sell at 636p, the stock closed at 683p after what appears to be a dead-cat bounce. Hold for now.

ITV (ITV)- suggested to sell at 78.05p last week, it closed yesterday at 74.4p. If the stock closes above 78p, cut the position.

Aquarius Platinum (AQP) – suggested to sell at 345.9p, the stock closed yesterday at 335.8p. Lower the stop to 352p.

Aveva (AVV) – suggested to sell at 1591p, the stock closed yesterday at 1592p. Keep the stop at 1675p.

Tui Travel (TT.) suggested to sell at 237.1p, the shares closed at 245.7p – cut the position.

The writer does not hold any shares or derivatives in the above mentioned companies. The material for this report comes from Sharescope.