FTSE 250 at 15-month high, Compass has European indigestion and De La Rue’s latest warning

“The winning trade for UK investors of late has been the FTSE 250 index which nudged up another 0.2% on Tuesday to 20,740, its highest level since August 2018.

“The market seems to be growing more confident that the Conservative Party will win the general election in December, thus bringing some clarity to what might happen with Brexit and – importantly – removing an element of uncertainty which has hung over UK equities for some time.

“Interestingly the pound wasn’t sharing the FTSE 250’s joy on Tuesday with a 0.2% decline against both the euro and the US dollar. One would normally expect the pound and the FTSE 250 to move in unison given the large number of domestic earners in the equities index.

“With just over two weeks to go until the big vote, it is important to remember that markets can see volatile swings on any political updates and so investors will be watching the polls very closely to judge the latest state of affairs.

“As for the FTSE 100, the index of large cap stocks traded flat at 7,390 with gains from consumer, financial and mining companies offset by weakness in insurers and catering group Compass whose shares slumped by 6% on a warning about weakness in Europe,” says Russ Mould, Investment Director at AJ Bell.

Compass

“The world’s biggest catering company, Compass, has served up a bit of a dog’s dinner alongside its full-year results.

“The numbers themselves are fairly solid but it is the accompanying commentary and guidance which is giving the market indigestion as the company takes a hit in Europe and certain other regions where both volumes and margins are under the cosh.

“Quite sensibly management are cutting their cloth accordingly, adjusting the cost base to fit this weaker macro-economic backdrop, but this will come at a cost in the short-term.

“What Compass does may be simple, its main business is running canteens and cafeterias in workplaces, but it does it very well.

“Operating in more than 50 countries, the breadth of its operations provides geographic diversification – so if performance in one part of the world is sluggish, another market can help make up any shortfall – as well as economies of scale. This, for example, helps it mitigate the impact of volatility in food prices.

“Compass has become a prized stock with many investors for the consistency of its returns but today’s news may place put the spotlight on the impact a global slowdown could have on the business.”

De La Rue

“Just when you thought it couldn’t get any worse for De La Rue along comes another wave of bad news.

“Shares in the banknote printer have now sunk to a 19-year low on a warning that it may not be able to stay running as a business if trading conditions keep getting worse, it incurs extra costs linked with various contingent liabilities and growth areas don’t achieve forecast margins.

“It is drowning in debt and has this year seen most of the executive team leave or resign, causing further instability in the business.

“In an increasingly cashless world one has to wonder just how long De La Rue can survive without a radical change to its business model. It has already restructured its operations into two divisions – authenticating goods as genuine and currency services – but one has to wonder if this is still enough to secure its future.

“The banknote print and security features markets are highly competitive and De La Rue hasn’t had the best track record with contract wins of late. We might have simply reached the point where De La Rue is best positioned as part of a bigger company rather than as a standalone entity.

“But would a potential suitor act now or sit on the side lines in hope that the price could get a lot cheaper? After all, De La Rue still has many negative factors to stomach including a fraud investigation into suspected corruption in South Sudan.

“The business seems to have fallen flat on its face as a result of poor management decisions at a time when it needed superior leadership to navigate difficult market challenges. Sadly shareholders are now suffering the consequences.”

These articles are for information purposes only and are not a personal recommendation or advice.