Unilever’s tea problem, and BT misses expectations

“The markets looked miserable as investors weighed up the prospect of the coronavirus hurting various parts of the global economy. Commodity prices continue to be hurt, particularly copper which has seen a large drop. Oil prices have also been weak and fell by 1.8% on Thursday to $58.76 per barrel,” says Russ Mould, Investment Director at AJ Bell.

“Companies are taking decisive action over their exposure to China, such as cancelling flights, closing stores and shutting factories. It is already clear that earnings will be hit as a result of the coronavirus and we still don’t know when the health incident will be contained.

“The Federal Reserve yesterday decided to keep US rates unchanged and that’s likely to be the same message from the Bank of England when it updates later today.

“On the London market, Shell and BP took a big hit following the drop in the oil price. BT was also weak as results missed expectations and miners fell on fears of reduced commodities demand from China. Investors sought safety in more defensive stocks with consumer goods, utilities and tobacco in favour."

Unilever

“It is little wonder that Unilever’s tea brands are poised over the rubbish bin after their sluggish showing left a bitter aftertaste in its latest financial results.

“With sales of products like PG Tips and Lipton under pressure in developed markets, suggesting either a move away from the traditional cuppa or less attachment to specific brands in this market, Unilever has been focusing on items such as premium tea and fruit and herbal varieties.

“However, it appears more drastic action might be required. The decision to launch a strategic review of its tea business reflects an attempt under CEO Alan Jope to reposition the company towards areas of higher potential, after a period in which growth has been harder to come by.

“Unilever has already parted with low-growth brands in the past – selling its spreads business in December 2017 for £6bn.

“The underlying group performance in the fourth quarter was actually a little better than expected after a pre-Christmas warning linked to declining sales in South Asia and West Africa.

“The company continues to expect a second-half weighting to 2020. This could be setting itself up for a fall if the anticipated recovery doesn’t come through.

“The risks of such a disappointment look greater given the escalating coronavirus outbreak in China, whose impact the company admits remains an unknown.”

BT

“BT’s third quarter results won’t do much to win over the market which has been sceptical on the company for a long time due to struggles with earnings growth, a large pension deficit and the need for hefty infrastructure investment.

“Not only are the results below expectations, but it now anticipates a £500 million hit from the Government’s cap on how much Huawei equipment can be used in the UK telecoms network. From 2023, the Chinese company can only have a maximum 35% market share of the UK network – that’s a problem for BT which has historically relied heavily on Huawei kit.

“Investors have been attracted to BT in the past for its generous dividends. These payouts have increasingly been questioned by the market who is worried about the company’s hefty investment plans and how that will gobble up its cash flow.

“Analysts aren’t forecasting any sales or pre-tax profit growth for at least the next three years and the consensus estimate is for the dividend to be cut by about 20% in the financial year ending March 2021.

“So for now this looks like a company stuck in the mud. It has bold ambitions and knows what it wants to look like in the future. It just needs to get on with the job and reposition the company for the 21st century. Until that journey is well on its way to completion, BT is likely to be treated with apathy.”

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