Rolls-Royce soars, Nvidia sees AI boost and WPP growth guidance beats expectations

“With the US markets calming down last night after a wobble on Tuesday, there was also a sense of calm across most of Asia and Europe on Wednesday. The exception was Japan’s Nikkei index, down 1.3% thanks to weakness among utilities, consumer cyclicals and industrials,” says Russ Mould, investment director at AJ Bell.

“On the Hang Seng index in Hong Kong, Techtronic Industries became the latest target for short sellers, with its share price slumping 19% after Jehoshaphat Research published a report claiming the power tools company has been ‘inflating its profits dramatically for over a decade with manipulative accounting’. By short selling the stock, Jehoshaphat stands to profit from a decline in the share price.

“It comes a week after arts and crafts platform Etsy was victim to a similar damning report from short seller Citron Research which accused it of selling goods that ripped off well-known brands.

“The FTSE 100 slipped 0.3% as a positive reaction to results from Rolls-Royce and WPP was not enough to offset weakness from various mining, pharmaceutical and consumer goods stocks.

“BAE Systems dipped nearly 3% on its full year results. Despite predicting higher military spend in 2023 which should improve its earnings, the negative share price reaction is most likely to down to investors taking profit after a strong run for the shares since Russia invaded Ukraine a year ago and how that led investors to seek exposure to the defence sector.”

Rolls-Royce 

“Describing a business as a ‘burning platform’ just days into his tenure suggested the need to put out some fires and that was very much what Rolls-Royce CEO Tufan Erginbilgic outlined alongside annual results.

“As firefighting exercises go, targeting seven areas of improvement at the outset is some going and it’s clearly got investors excited. Erginbiligic has taken advantage of the leeway offered with a new broom and swept away the annual dividend despite profit proving more resilient than feared in 2022.

“A two-decade veteran of BP, Erginbilgic has brought in former colleague Nicola Grady-Smith as chief transformation officer – effectively the co-pilot for his turnaround programme.

“For years Rolls-Royce has disappointed on cash flow and it’s no surprise to see this as an area of priority alongside the standard recovery mantra of improving efficiency, reducing debt and improved ‘performance management’.

“What should give Erginbilgic a fair wind is the improved prospects for the aviation sector. One of the company’s most lucrative areas of operation is providing spares and repairs on an installed base of aircraft engines. These are directly linked to how long planes spend in the air, and the pandemic and subsequent uneven rebound in air travel has had a significant impact on the company and its balance sheet.

“Plans for a strategic review suggests there could be further disposals to help reduce borrowings after the divestment of ITP Aero in 2022.”

Nvidia 

“Chip giant Nvidia brought some relief to the tech sector after beating market expectations with quarterly results.

“The company is increasingly optimistic about artificial intelligence, helped by ChatGPT being the ultimate water cooler discussion point this year.

“It’s been ages wince we’ve had a real buzzword in the tech space and the chatbot has certainly taken the world by storm in a very short period of time. Nvidia stands to benefit as its chips are used to develop machine learning software.

“The company calls its DGX system an ‘AI supercomputer’ and ‘the blueprint of AI factories’ being built around the world. The newly announced launch of a cloud-based version of the system makes it even easier for companies to get on board this megatrend.

“When you have ‘the next big thing’ in tech, it’s natural for investors to scramble to find ways to play the theme. Nvidia’s involvement in the AI space now puts it directly under the spotlight which means there could be strong demand for the shares, explaining why there has been a positive market reaction to its latest results alongside the earnings beat.”

WPP

“Advertising spend is directly tied to the economic backdrop, so investors can take some wider encouragement from the unexpectedly sunny outlook outlined by WPP.

“Before anyone gets too excited growth is still set to decelerate in 2023, but not as much as analysts had feared. The company is proving successful at reducing costs and any concern about the size of its debt pile is assuaged by an eye-catching increase in the dividend.

“While Mark Read is unlikely to receive too many garlands for his performance, given the shares are lower than when he started as CEO in 2018, he does deserve credit for stabilising the business in the wake of founder Martin Sorrell’s acrimonious departure and seeing it through the pandemic and a continuing structural shift in the advertising market.

“If he can get WPP to deliver robust performance when the backdrop is challenged, he will hope to impress when economic conditions move more in its favour.”

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