“The FTSE 100 continues to enjoy a robust showing, this time led by resources stocks and a well-received update from Reckitt,” says AJ Bell investment director Russ Mould.
“Markets seem to have put a wobble inspired by Middle East tensions and interest rate worries behind them for now, with Friday’s core PCE reading of US inflation the next key test. If this suggests inflationary pressures are looking entrenched it could lead to a further scaling back of rate cut expectations across the pond.”
Lloyds
“There wasn’t much for shareholders to celebrate from Lloyds’ first quarter numbers. The company fell down on the key metric of net interest margin on which every bank is judged, with the difference between what it generates from loans and pays out for deposits shrinking.
“The company has seen competition in the mortgage market bring down its returns and savers move deposits into higher interest accounts – meaning it is paying out more to customers.
“Lloyds’ brief moment in the sun, when rates moved sharply higher and it was able to generate higher margins, seems to have come to an end. This period has not translated into any meaningful gains for a share price which has basically gone nowhere after making a partial recovery from pandemic losses. Costs are going up thanks to planned restructuring and a change in the charging approach for the Bank of England levy on the sector.
“On the positive side of the ledger, the slight improvement in the economic outlook is helpful in terms of impairments which tracked a bit lower in terms of what had been forecast. There will be relief at a lack of new provisions associated with a brewing car-finance issue. The last thing Lloyds needs is another PPI-style scandal to damage the brand and hurt profit.
“For now, the company is confident enough to stick to its 2024 guidance and Charlie Nunn, now nearly three years into his tenure, needs to deliver on an ambitious 2026 returns target if he is to maintain the confidence of the market.”
Tesla
“Investors feared the worse in the run-up to Tesla’s results as there were clear signs life wasn’t going well. Large job cuts and multiple reductions in the price of its products implied the company was having to make big decisions because demand wasn’t meeting expectations.
“Competition has been fierce and consumers have been thinking twice about big-ticket items as their finances come under pressure from the higher interest rate environment.
“Sentiment towards Tesla was weak as its results were published and a sharp drop in profits was widely expected given margins have been under pressure. Therefore, it would only take the smallest bit of good news to trigger a share price rebound and that’s exactly what has happened in pre-market trading.
“What’s taken the market by surprise, and in a positive way, was the decision to bring forward the launch of new electric vehicle models. The thought of something new and exciting has led investors to speculate this could be the company’s saving grace. Tesla has historically basked in the glory of any publicity and the company needs its products to be seen as must-have items once again.
“Elon Musk says the new product line will not only include more affordable vehicles but will also be produced on the same manufacturing lines as its current vehicle range. That means no massive investment in new factories and the ability to make the most of existing facilities – all good for the bottom line.
“Tesla used to be all about first-mover advantage rather than profits. That’s now changed as it is being judged like a more mature business where financials really matter. Therefore, sweating its existing asset base to make a broader range of vehicles is deemed positive by the market.”
Reckitt
“Reckitt chief executive Kris Licht seems to have a different definition of the word ‘good’ than the one you would find in a dictionary. First quarter like-for-like revenue growth at 1.5% was below the full-year target of 2% to 4% while volumes fell 0.5%, including a 9.4% volume decline in nutrition. That’s hardly what you would call a ‘good’ performance, as Licht does.
“There are two major challenges for Reckitt. The first is making sure price hikes don’t weaken demand – if volumes decline, it suggests customers have reached their limit with higher prices and are cutting back or shopping elsewhere.
“The only bit of the business that seems to be firing on all cylinders is the hygiene arm, with gains in both price and volume. Reckitt notes that customers are starting to trade up to what it calls ‘more superior’ products. That is music to the ears of investors who have been waiting for a pivot in the landscape for big brand owners, hence the share price jump on the news.
“In a nutshell, we’ve seen the public trade down in recent years to supermarket own-brand or cheaper alternatives amid the cost-of-living crisis. That’s been a testing time for companies like Reckitt which rely on the power of the brands to shift goods. If the tide is now turning, it’s positive for Reckitt although this trend needs to extend across all its portfolio to really make a difference.
“The second challenge for the business is the one that’s led to its worst share price performance in four years. The shares slumped earlier this year amid fears over litigation around the safety of its Enfamil baby formula. The market is worried that a recent court instruction to pay $60 million to a mother of a premature baby who died after being fed the product is the first in a long line of payouts. A mountain of liabilities from hundreds of lawsuits could add up to a significant sum.
“A trial on another one of these lawsuits begins in September, meaning there could be an overhang on the shares for months to come as investors speculate the scale of any potential liabilities.”
Jet2
“While Jet2 looks well positioned ahead of its key summer trading period the travel operator spooked investors as it warned of more competitive pricing.
“This could be a sign that the pricing power enjoyed by the sector, with people prepared to pay whatever it takes to get their week in the sun, is starting to ease.
“The company’s customer-focused approach should continue to stand it in good stead and help it defend market share from rivals.”
These articles are for information purposes only and are not a personal recommendation or advice.
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- Thu, 02/05/2024 - 10:55