FTSE up modestly, oil up on OPEC cut but Shell hit by weak performance, Imperial Brands is swimming in cash, strong sales for Diageo and Motorpoint stalls

“It doesn’t feel like Tuesday’s market rally was built to last as the dollar is back on the march. While the FTSE 100 is modestly higher this morning, there is no great momentum behind it,” says AJ Bell Investment Director, Russ Mould.

“The gilt market is once again under pressure as a second ratings agency effectively puts the UK on watch for a credit downgrade. The current Government still has a job on its hands to convince it has a handle on the country’s finances.

“Adding to a difficult picture, oil prices are back on the move. Having helped ease inflationary pressures in the last month or two as crude slipped back, OPEC’s decision to go for higher-than-expected output cuts is driving the market higher once again.”

Shell

“Yesterday’s announcement of big production cuts from OPEC and a resulting boost for commodity prices should in theory be good news for Shell, which produced its usual teaser ahead of third quarter results.

“However, fans of the business might have been metaphorically throwing popcorn at the screen as disappointing production levels, weaker refining and gas trading are expected to have a negative impact on performance.

“For all that Shell has benefited from the surge in energy markets in 2022, it is not immune from a slowdown which will impact demand for refined products.

“Shell CEO Ben van Beurden’s recent comments that governments should tax oil and gas businesses to help the poorest in society may have come from a genuine place, but also show an awareness that the industry needs to be prepared for a regulatory and political backlash given the excess profit it has generated this year.”

Imperial Brands

“Imperial Brands’ update would give you the impression nothing bad is happening in the world. The cigarette and vaping company has so much spare cash sloshing around that it is going to return £2.3 billion to shareholders via dividends and share buybacks. That’s 13% of its market value, which is astonishing.

“Companies buy back shares when they think their stock is high, so Imperial Brands allocating £1 billion for its share buyback programme running to September 2023 gives you a clear indication of what it thinks about its current market value.

“It is gaining market share and is also bringing down the ratio of net debt to earnings despite still investing in the business to make it more competitive in the future.

“Investors look for so-called defensive companies which do well no matter the state of the economy, and Imperial Brands has become the poster child for this category. Smoking and vaping is addictive and unhealthy, so it is by no means a perfect company. Yet for investors without morals Imperial Brands has been a rare gem of a stock this year, with its share price up 20% year-to-date, significantly outperforming the FTSE 100 index which has fallen nearly 6%.”

Diageo

“Despite all the pressures on consumers, the latest update from global drinks giant Diageo suggests people are still finding the money they need to buy their favourite tipple.

“The company’s focus on spirits should help protect margins given these are typically quite inexpensive to manufacture but also have strong brand loyalty, and there is a growing appetite for this category of drink in emerging markets.”

Motorpoint

“It looks like the bubble in used cars is over. Supply chain issues and chip shortages meant new vehicles weren’t rolling off the production line at their usual pace and the forecourts of operators like Motorpoint, which specialises in nearly new cars, enjoyed very strong volumes and ticket prices.

“The scale of the drop in volumes in September is somewhat alarming, though not all that surprising. When household budgets are under such acute pressure it is much harder to commit to spending on a really big-ticket item like a car, instead garages may be busy keeping older vehicles on the road for longer.

“The market will not be reassured by the lack of any visibility from Motorpoint on what next year might look like. Management deserve some credit for holding their nerve and continuing with strategic investments to grow market share, although at some stage investors may look for a gear change to ensure the company has a healthy buffer with the road ahead unlikely to be a smooth one.”

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