FTSE higher as packaging sector rallies, Dunelm is a retail shining star, and Barratt reveals solid foundations

“The FTSE 100 made a robust start on Wednesday, lifted by some decent corporate results and a rally in the packaging sector,” says AJ Bell Investment Director Russ Mould.

“Smurfit Kappa helped lift its industry peers with guidance for rising prices that should benefit the entire space amid strong demand.

“Overnight John Foley fell off his bike as Peloton announced its founder would step down as chief executive, with this and a slashing of its workforce aimed at heading off pressure from an activist investor.

“It is only likely to ramp up speculation about a bid for the business, which despite hitting a wall after building up a head of steam during the pandemic, remains a valuable brand in the emerging tech-based exercise market.

“The £1.4 billion in Covid-related sales GlaxoSmithKline pointed to last year are a positive in one sense but this chunk of business may start to ebb away as we emerge from the pandemic.

“The impact on Glaxo won’t be as large as on Pfizer which revealed yesterday that, after its vaccine helped double revenue and profit in 2021, its expectations for this year are more downbeat.

“GSK looks set to chalk up some healthy growth in 2022 as it gets set to spin off its consumer health arm in the middle of this year.”

Dunelm

“Dunelm is reaping the benefits of having an incredibly well-run business and the tailwind that Covid has brought to spending more money doing up the home.

“Sales, profit and margins are all up, shareholders are getting a bonus dividend and current trading is upbeat.

“The business wisely invested in improving its digital channels a few years ago and so it was well positioned as the pandemic increased the shift towards buying online.

“It has also recognised the importance of superior customer service with a wise decision to invest in staff training and have representatives on the shop floor with iPads offering advice and help to customers.

“Just as everything seems to be going swimmingly along comes a major headwind in the form of soaring energy prices, higher National Insurance tax, and a general inflationary environment. Family finances are coming under pressure and that could hurt discretionary spending.

“If someone has a few hundred pounds less in their pocket after paying the bills each month, they are going to make some tough decisions about how the remaining cash is used. Do people really need to buy more cushions for the home or new curtains?

“At first glance, one might think Dunelm is vulnerable as many of its goods are non-essential. However, what we might see is a shift in the type of products being bought.

“There is always going to be some demand for towels, lights, cooking equipment and bedding, all of which is sold by Dunelm. The retailer should also benefit from having bulked up its value proposition, with more entry-price products and promotional deals.

“A greater volume of lower-priced items might not necessarily be good for its profit margins, but there seems a good chance that its tills will continue to ring during what could be a difficult time for many other retailers.”

Barratt Developments

“It’s been a tough time of late for the housebuilders with investors taking fright at moves by the UK Government to get them to pay a greater share of the cladding repair costs required to meet fire safety standards.

“The combination of this factor with growing fears that the current buoyancy in the housing market will deflate sooner rather than later has seen billions wiped off market valuations in the sector.

“Barratt’s first half results are helping to mend some of the damage, with the company sitting on an extremely generous cash buffer to help it meet any extra expenses on the cladding side while still maintaining returns to shareholders and investing in areas such as land acquisition.

“The company has done a decent job of managing the impact of rising build costs with a limited impact on profitability so far.

“Critically Barratt is also bullish on the outlook, raising guidance for the number of completions for the current year above pre-pandemic levels.

“What goes up, must come down at some point and while there are drivers for the housebuilding sector, like the requirement for more space and people moving out of urban centres, growth is likely to slow at some point.

“The cost of living crisis will impact consumer demand, which in turn has strong links to the housing market, and rising interest rates will also impact the cost of mortgages.

“All Barratt can do is ensure it is on the firmest foundations possible when the downturn does come. Concluding the competition authorities’ probe into its sale of leasehold properties, as some of its rivals have already done, would certainly be welcomed by the markets.”

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