Tesco has caught the headlines over the past week following the sudden ousting of CEO Philip Clarke just days shy of his 40th anniversary with the company. However, the former shelf-stacker was not loved by all, as evidenced by the rise in Tesco’s share price immediately following the announcement. Mr Clarke became CEO of Tesco in 2011 and had the unenviable task of filling the boots of Sir Terry Leahy, who was celebrated as one of the most successful retailers in Britain at the time. Moreover, the timing was unfortunate as it was becoming evident that the store portfolio was too heavily weighted towards large, out-of-town locations and that overseas operations were causing a strain on earnings. Nonetheless, critics have said that he was too slow at tackling these issues, letting overseas operations drag for too long and not reducing prices enough in the UK to help defend market share against discount competitors.
Mr Clarke’s successor, Dave Lewis (a senior executive at Unilever) is the first outsider appointed the role in Tesco’s near-100-year history. Top of Mr Lewis’ to-do list will be putting together a strategy for avoiding further market share losses to discount rivals and strengthening the Tesco brand. The latter will play to Lewis’ strengths as his work at Unilever was brand focussed, managing names such as Lynx, Dove and Tresemmé in the personal care section of the business.
Global telecommunications giant Vodafone provides voice, messaging, data and fixed line services to around 360 million customers in over 30 countries. Mobile services currently make up 81% of the group’s service revenue and the company is now looking to make the transition into becoming a vertically integrated telecommunications company by acquiring more fixed line assets. The recent sale of its 45% stake in the American company Verizon Wireless for $130 billion allowed Vodafone to return 65% of the proceeds back to shareholders while retaining ample financial flexibility to cut debt, pursue its goal of becoming a unified communications provider and fund Project Spring – a new two year £19 billion investment programme to improve the quality of its networks, products and services.
These new ventures are admirable but it is worth noting that the company has recently published poor results across Europe due to intense competition and loss of market share in Germany, Italy, Spain and the UK. Indeed, 65% of Vodafone’s revenue is generated in Europe, where regulatory pressures have perhaps artificially maintained too many rivals in each market – this is of course beneficial for customers but has restricted the industry in terms of infrastructure investment.
The UK is Vodafone’s second largest market with 19 million customers and things are about to become more interesting in the mobile telecoms sector with BT’s recent announcement that it will return to the mainstream mobile market before the end of the year.
This week I am discussing the Perpetual Income & Growth Investment Trust (PLI), which was recently downgraded by Morningstar to an Analyst Rating of Bronze.
PLI has been managed by Mark Barnett since 1999 with the aim of producing capital growth and real growth in dividends over the medium- to long-term by investing primarily in equities listed in the UK. During the past 10 years, PLI’s share price has increased by 227% compared with a rise of 129% by the FTSE All Share Index.
Morningstar evaluates a range of factors that are likely to lead to outperformance over the longer term on a risk-adjusted basis. From this, they assign funds with a rating on a five-tier scale ranging from Gold (best-of-breed) to Negative (future performance is likely to be hampered), with Bronze halfway in between.
While Morningstar views Mr Barnett to be a good manager, he is now managing an additional £2bn of assets since taking over various mandates from Neil Woodford, who left the company earlier this year to set up his own firm. Morningstar is therefore concerned about the impact on his investment approach.
At the time of writing, PLI is predominantly invested in giant and large cap companies such as BT, AstraZeneca and British America Tobacco and is trading at a 0.7% discount to its net asset value, having traded as high as a 2.5% premium during the past 12 months.
Marks and Spencer is a common name on the high street and one of the largest high-street retailers in the UK. Retail as a sector is undergoing vast changes as the balance shifts to more online shopping and less high street presence. This has meant companies such as Marks and Spencer have had to change their business to keep up with the shift to a more digital platform.
Tasked with this is Laura Wade-Gery who is in charge with the online operations and has recently been promoted to head up all M&S UK stores as well. This promotion has surprised some analysts as last month M&S warned that “teething troubles” regarding the recently launched new website would hit sales for the first quarter. This looks likely to be the 12th consecutive quarter where sales have fallen on clothing and homewares.
The promotion of Ms Wade-Gery has sparked some speculation of succession to chief executive Marc Bolland, although there are a number of other high profile candidates in the M&S management team.
Marks and Spencer are just one of many retailers struggling to target the online market efficiently. They recently spent £150m in revamping the website and, despite this large expenditure, encountered issues which hit sales. Now the website has gone through these initial problems the company will be hoping to see an increase in website sales. The website currently accounts for 16% of sales.
This week I am looking at Pearson, which is the largest book publisher and education company in the world. It is currently going through a period of exceptional spending on restructuring with the aim of bringing education into the digital world. The company has a long history of continual restructuring and in a ‘normal’ year they would spend £20-30m on this – at present they are currently in a phase of attempting to do 5-6 years’ worth in 1 or 2. The pace of this transition has been accelerated in response to customer requests and a desire to get ahead in digital education. The company expects US college enrolments to stabilise in 2015 after a rocky few years (a key indicator, given sales of text books and digital learning media) and is seeing the education spending hiatus beginning to lift in the US.
Pearson reiterated on Friday its expectations for a profit decline in the six months to 30th June compared to the same six months in 2013. This is predominantly due to restructuring charges and the appreciation of sterling against the US dollar and key emerging market currencies (over 75% of revenues are derived in non-sterling currencies). The share price dipped 2.7% before recovering to end the day down c. 0.8%. This was a reiteration and so provided investors with a reminder rather than anything new and in any case Pearson’s profits are always heavily weighted to the second half of the year. Investors may need to wait until further news regarding US college enrolments before seeing if Pearson can come through this period of transition in better shape having created opportunity in a market which has been on pause for an extended period.