Tag Archives: stock exchange

Stocks in Focus: Marks & Spencer

This week I have been looking at retailer Marks & Spencer.  The high street continues to evolve and is going through a serious period of upheaval.  Disruption is being driven by the online shopping revolution, led by Amazon, which is changing consumers’ purchasing habits.

The internet has been a deflationary influence on pricing, which has been beneficial to the “squeezed” consumer.  However, with the headwinds from an increase in business rates and the National Living Wage together with inflationary pressures of increased input costs driven by both currency and the cost of raw materials, profit margins of traditional bricks and mortar stores continue to shrink.

Marks and Spencer reported its 3rd quarter earnings in early January, which included its Christmas trading statement.  Sales at the company’s Simply Food business underperformed, previously viewed as one of the strongest growing divisions.  This was particularly disappointing versus its food peers who reported strong Christmas figures.

At the end of January the company announced the closure of 14 stores nationally, which meets with its 2016 programme of repositioning around 25% of the company’s Clothing & Home space.  This forms part of the company’s cost saving strategy which also includes the reduction in the pace of openings for its Simply Food stores.

Not only does the company need to continue with constructively cutting costs, but it also needs to demonstrate how it is innovating within Clothing & Home and Simply Food in order for the company to remain relevant in an increasingly competitive marketplace.  Marks & Spencer has a reputation for delivering good quality products, however ensuring that these products reach consumers in as efficient manner as possible will define how the company succeeds in the future.

Marks & Spencer will update the market with full year results at the end of March.



Stocks in Focus: Reckitt Benckiser

This week I’m looking at Reckitt Benckiser, the consumer goods company known for its health, hygiene and home products, following its full year results last week.  The results were disappointing after a turbulent 2017 with the company reporting flat net revenue growth and a decline in profit margins.

The results did not come as a surprise to investors as the company suffered a series of “one-off” problems during the first 3 quarters of 2017. Reckitt was one of several multinational companies to be affected by the global cyber attack in June last year, which disrupted its ability to manufacture and distribute products to customers in multiple markets.  The company has also struggled with the failed product launch of a new Scholl pedicure product, ongoing fallout from a South Korean safety scandal, and volatility in India due to the implementation of goods and services tax.

Despite the poor performance, Chief Executive Rakesh Kapoor is determined that the business can recover, and this was shown in Q4, reporting 2% net revenue growth. The recent acquisition of Mead Johnson, the global baby formula company, has contributed to Reckitt becoming a major player in the consumer healthcare segment, and as a result Kapoor has made the decision split the company into two units – one focused on healthcare and the other on home and hygiene products.  However, the new organisation structure is likely to be costly and the company has declined to give a margin target for 2018, admitting that it will be affected by the reorganisation.

Kapoor remains confident that the company can make a comeback after a difficult year, and strong performance of previous years stands him in good stead. However, only time will tell if the reorganisation within the company has come at the right time and if management are more prepared for any future issues that may occur.


Stocks in Focus: Tesco Plc

At the beginning of last year, Tesco announced a proposed merger with Booker Group Plc, the UK’s largest food wholesaler, in hope of strengthening the retailer’s UK offering. After many months of consideration and despite concerns from competitors, the Competition authorities finally confirmed their approval in December 2017, which was welcomed by both groups and their shareholders.

With the merger expected to complete in March 2018, Tesco has now confirmed that Charles Wilson, the current CEO of Booker Group will be appointed as CEO of Tesco’s retail and wholesale operations in the UK and Republic of Ireland. Mr Wilson has been with Booker Group for 20 years, where he was credited with driving the group’s successful turnaround following near collapse in 2007. His knowledge and long term experience in the sector should prove beneficial for the business, where he could be seen as a prime candidate for succession of Dave Lewis, the current CEO of Tesco.

Tesco has also announced that it intends to pay a final dividend of 2.0p per share for the current financial year, which brings the total dividends paid for the year to 3.0p per share.  The decision to pay a dividend demonstrates management’s confidence in the business and is reassuring for shareholders, who had not received a dividend since the accounting and operational issues that forced it to be cancelled in 2014.

Despite the encouraging steps that management are taking to turn the business around, Tesco still faces strong competition from the Limited Assortment Discounters (LADs); Aldi and Lidl. With the “big 4” supermarkets continuing to lose market share to the LADs, only time will tell whether the new approach is enough to restore the company to its former glory.


Points of View: Current Market

Over the past month the FTSE 100 has fallen approximately 700 points, or 8.8%.  This has come as investors comprehend an environment of rising interest rates and potentially higher global inflation, following a sustained period of loose monetary policy.

The Monetary Policy Committee of the Bank of England met on 7 February 2018 and voted to keep interest rates at 0.5, however also suggested that rates may rise more quickly than previously anticipated.  Interest rates can have an impact on nearly all asset prices.  All other things being equal, a quicker than anticipated rise in interest rates means that bond yields rise, causing bond prices to fall and that in turn causes equity prices to fall.

This is broadly what has been observed in the US market recently.  Wage growth inflation has been higher than expected.  Interest rates are one of the tools used to control inflation; therefore a higher than expected inflation figure may lead to the US Federal Reserve raising interest rates faster.  This fear of rate hikes sparked a bond sell-off, which caused US equity markets to fall.  The effect was exacerbated by an outflow from investors of low volatility strategies, causing a raft of forced selling.  The US market tends to lead the way for equity markets across the globe and the fall in US stocks was a precursor for the UK market falling back.

In the short term, rising inflation and interest rates remain a headwind for UK equities, however historically companies have been able to pass rising costs on to consumers and grow earnings faster than inflation over the long term.  Our opinion remains that equities remain the best asset class to outperform inflation over the long term.  In the short term markets may be more volatile, as evident this year so far, but for investors taking a long term view short term volatility eventually becomes insignificant.


Stocks in Focus: Templeton Emerging Markets

This week I am reviewing Templeton Emerging Markets (TEM), which is the largest investment trust within the Emerging Markets sector. The Trust has recently seen an unexpected change, with lead manager, Carlos Hardenberg, handing in his resignation.

Last September I wrote an article reviewing the Trust and Mr Hardenberg’s first two years as lead manager. During this time Mr Hardenberg outperformed his benchmark (96% vs 67%) and transformed the Trust into quite a different beast than the one he took over. One of the more significant changes was his push into the technology sector. At the end of December 2017 the technology sector was the largest weighting within the Trust at 31% (vs 6% in mid 2015), with giants such as Samsung, Alibaba and Tencent featuring in the top 10 holdings.

Effective immediately, Chetan Sehgal will be taking over as lead manager. Our early understanding is that he will look to keep the Trust running with the same investment process. Mr Sehgal has been with Franklin Templeton since 1995 and is a senior Managing Director and Director of the Global Emerging Markets and Small Cap Strategies. He should be capable of maintaining the process as he has been working closely with Mr Hardenberg during his tenure and was a part of the previous team under emerging market veteran Mark Mobius.

Given how much Mr Hardenberg had turned the Trust around and developed the existing strategy, this is quite a large disruption and causes some concern. We will monitor developments closely and expect to meet with Mr Sehgal in the near future to hear his plans for the Trust’s portfolio.


Stocks in Focus: Diageo

This week I am looking at Diageo plc, one of the world’s largest beverage groups. The business, which is known for its stable of recognisable brands such as Johnny Walker, Guinness and Smirnoff, has recently announced its interim results for the period ending 31 December 2017.

Overall, the results were encouraging. The company’s year-on-year increase in sales was above analysts’ growth expectations, pre-tax profits rose by 6% and earnings per share grew 9.4% compared to the previous year. Management has raised the interim dividend by 5% and stated that they expect further margin growth and improvements in net sales over the next 18 months. They also highlighted that the recent strengthening of the pound against the dollar would hit full-year sales and operating profits as the US is Diageo’s largest market and contributes nearly 45% of its profits. However, management also added that the Trump administration’s recent tax cuts would offset some of the negative currency impact.

CEO Ivan Menezes launched a cost-saving programme a couple of years ago and the recent interim results show that the project has been diligently executed. The underlying business is delivering well against expectations and is on track to meet its 2019 target to become more efficient, leaner, and more agile. Looking at Diageo’s market segments, a growing middle class in emerging markets is playing into the group’s hands too. As consumers move up the value chain, the advantage of Diageo’s big portfolio of brands is that it can provide premium labels to meet every taste. Furthermore, cash flow remains robust and the recent dividend increase continues an enviable record of dividend growth that stretches back to the 1990s.


Stocks in Focus: GKN

This week I am looking at GKN, the British automotive and aerospace components company, which last week rebuffed a takeover approach from Melrose plc – a firm that specialises in buying and turning around manufacturing companies. The informal bid from Melrose was a £7billion cash and share offer (equivalent to 405p per share at the time it was announced) along with proposals for improving GKN’s performance. The board of GKN has turned down the unsolicited offer stating that the approach was opportunistic and that it undervalued the company.

The approach from Melrose comes at a particularly difficult time for GKN. The group has issued two profit warnings since October 2017 and the incoming chief executive Kevin Cummings stepped down at the same time with the company warning about problems at its US aerospace division which he headed up. Melrose intends to formally pursue its takeover proposal and it will present GKN shareholders with an argument that the company is “an overly complex and under-managed organisation”.

In contrast, whilst the outlook is cautious and performance has been muted in the short term, GKN stated that it is trading in line with expectations. The company remains a well-diversified, high quality engineering company that is a prime supplier to the world’s biggest aerospace companies and provides parts and systems to a number of car manufacturers.

A key consideration for long term holders of a company in a prospective takeover is whether the offer price represents good long-term value and whether higher bids might be forthcoming. Melrose has until February 9 to make a firm offer and investors expect further talks and possibly a higher offer.  In the meantime, there are rumours that US buyout company Carlyle Group is also interested in GKN.