Morrisons sharpens focus, and Rolls-Royce sticks to cash targets as losses mount

“The UK may be hit by fierce winds, but global markets have a found a way to ride above the clouds and enjoy a moment of calm in the sun. Markets across Europe and Asia are pressing ahead, following gains on most of the major US indices last night,” comments Russ Mould, Investment Director at AJ Bell.

“The FTSE 100 nudged up 0.2% to 6,735 with a reversal of recent trends. Stocks that had been winners earlier in 2021 such as housebuilders and banks were among the biggest fallers on Thursday, while miners and technology stocks bounced back after recent weakness.

“Inflation figures weren’t as bad as expected in the US, which caused investors to question if they’ve been worrying too much.

“Also helping to repair investor sentiment was Congress approving the $1.9 trillion US stimulus package. This will provide support, among other things, for small businesses and cash for eligible individuals, the latter expected to make some of its way to the stock market.

“It also paves the way for the US government to start working on a plan to spend big on infrastructure, which is a major driver for commodity markets and shares in mining and construction companies.”

Morrisons

“It’s become very clear that supermarkets haven’t been able to translate a surge in business into higher profits during the pandemic.

“That’s not a criticism of how they operate, but merely a reflection of the pressures they’ve been under to keep the nation fed.

“They’ve had to take on significant extra costs related to Covid, all while remaining calm as shoppers expect everything they want to be on the shelves or online grocery slots to be regularly available.

“Morrisons’ results are indicative of this situation. Big sales growth, higher costs, lower profits, and a cash outflow rather than inflow due to paying suppliers promptly, lower fuel sales and having to carry higher stock levels.

“If ever there was a time to judge a company on actions taken to be a responsible business, rather than simply doing anything to drive profit, it is now.

“Strategically there are some big achievements, including the fact that its partnership with Amazon is certainly going places.

“Morrisons has scored another point by being a supplier to the retail giant’s new physical grocery store in London.

“This achievement will no doubt fuel speculation that Amazon may one day decide to acquire Morrisons, although Tesco would equally be an obvious bid target if the US giant wanted to quickly gain scale in the country.

“If anything, it feels as if the pandemic has made Morrisons sharpen its focus, with a keen eye on making sure customers are satisfied and the business is run more efficiently. Those actions will pay off in the long run.”

Rolls-Royce

“Sometimes news is not a surprise but can still shock and the huge losses chalked up by aircraft engine maker Rolls-Royce fall into that category.

“It was inevitable that the increasingly existential threat to the aviation sector would leave some scars, but the scale of the wounds inflicted on Rolls will take a long time to heal.

“Chief executive Warren East was already well into a turnaround of the group when Covid-19 hit after Rolls hit a sticky patch in the early 2010s marred by profit warnings and a cash crunch.

“Whether he will feel able to lead another fix-it job at Rolls-Royce has to be open to question after the coronavirus crisis effectively brought the business back to a worse position than when he started.

“For all the massive losses, the key takeaway from the latest annual results is the reiterated guidance for cash flow to turn positive at some point in the second half of this year and to generate positive free cash flow in 2022.

“The company is being quite candid that this is dependent on the pace of the recovery in engine flying hours and its restructuring process. Rolls’ lucrative spares and repairs revenue on its installed base of engines relies on planes being in the air.

“This is entirely outside of its control and depends on the course of the pandemic and the extent to which restrictions on overseas travel are lifted. Investors will have to hope Rolls’ assumptions are sufficiently conservative or further turbulence could be in store.”

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