FTSE lower on Powell rhetoric, Sainsbury’s gains market share, BT cost-cutting, Howden defies spending crunch, and Rolls-Royce sticks to guidance

“Every time the market seems to get its hopes up that the Federal Reserve will pivot away from rate hikes, its chair Jerome Powell emerges to dash those expectations,” says AJ Bell Investment Director Russ Mould.

“To be fair to Powell he has remained consistent in his messaging. But it is proving difficult for investors, who are used to more than a decade of supportive central bank policy, to believe in his tough talk.

“The FTSE 100 is appreciably lower on Thursday morning as the Bank of England gets set for its own rate hike.

“However, the scale of the fall on the FTSE is less than that seen on Wall Street overnight as the index’s collection of high dividend-paying, relatively lowly valued, old world economy stocks is less vulnerable to higher rate expectations.”

Sainsbury's

“Food price inflation may be continuing to climb but, when it comes to the factors within Sainsbury’s control, it seems to be doing a decent job.

“The company’s efforts to keep prices as low as possible, while still preserving quality, is paying off in terms of some modest market share gains. Given Sainsbury’s positioning you imagine this might be at the expense of higher-end grocers like Waitrose and Marks & Spencer, rather than the discounters.

“Investors always like to see costs coming out of a business, so long as it’s done in a sustainable way and Sainsbury’s is ticking that box at the moment.

“Selling food and consumer staples is not a bad place to be in a downturn - after all, we still need to eat and clean ourselves and our homes. However, the picture is complicated by Argos which is much more exposed to discretionary consumer spending. In that respect, Sainsbury’s confidence on the outlook for the Christmas period is notable.”

BT

“Inflationary pressures on BT are so fierce that it has got to do something radical to keep a lid on costs. Normally an announcement that it is going to find an additional £500 million of cost savings would be applauded by investors, but that’s not the case now.

“There are a lot of demands on BT’s cash, such as the need to invest heavily to improve its infrastructure and to deal with significantly increased energy prices.

“Other negative factors in its latest results underline the problems facing BT. Broadband market growth has slowed, industrial action has disrupted the company, and free cash flow is expected to be at the lower end of its target.

“The broadband industry is highly competitive, and BT needs to make sure it can provide a reliable service without excessive prices that force customers to defect to rivals. That means it already faces a tough job, which is set to get even more difficult as it is forced to find more places to slash costs. There is a danger it cuts too far, and service suffers.”

Howden Joinery

“Cost-of-living crisis putting people off spending? There’s no sign of that happening with Howden Joinery.

“In an economic environment where the idea of sinking many thousands of pounds into a new kitchen seems unthinkable to many, Howden continues to surprise everyone with solid trading.

“Profits for this year are going to be better than expected and the business is confident enough to keep investing to improve its market position and capabilities.

“While there are certainly cracks in the DIY market, perhaps households are happy to keep spending on larger projects that could transform their home. With interest rates going up, more people are going to stay put rather than move house and so they might be prepared to make that investment to spruce up their property.

“If you’re planning to stay in one place for a while it makes sense to invest in a good kitchen, which is one of the central parts of the home for a lot of families.

“Howden is a smart operator with a history of being able to adapt with the times, and a good record of making strong returns from the money it invests in its business.”

Rolls-Royce

“As a parting gift retiring CEO Warren East has managed to keep Rolls-Royce on course to hit full-year expectations but, beyond this headline, there are a huge number of challenges stacking up for his successor Tufan Erginbilgic.

“The company is hoping it can recover any impact of cost inflation from rising wages, raw material and component costs by finding operational efficiencies, but the pressures are acute, and any slippage could leave profit exposed.

“The metric which probably keeps Rolls’ executives awake at night is flight hours. Lucrative spares and repairs revenues are dependent on the wear and tear from planes being in the air. Here the news is positive as a return to some level of post-Covid normality continues.

“Rolls is still groaning under the weight of a lot of debt taken on during the pandemic, though it is chipping away, paying back a significant sum this year thanks to the sale of its ITP Aero business. On the flipside this is cash which could otherwise have been returned to shareholders or invested in improving the company.”

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