Markets end the week on a high, Tesco shares slip, and Travis Perkins warns on profits

“A decent showing on Wall Street last night has helped to put investors in a good mood, with the key markets across Europe and Asia ending the trading week on a high,” says Russ Mould, Investment Director at AJ Bell.

“Telecoms, consumer healthcare and miners helped to drive the FTSE 100 0.5% higher to 7,669.

“ASOS continued its rebound following yesterday’s trading update and news that Frasers was lifting its stake in the business, which now stands at 10.6%. Frasers itself topped the FTSE 100, rising 3.1%.

“The big question is whether Frasers will make a full takeover of the fashion retailer or stay true to form in just having a strategic stake. It likes to grab a bargain and typically buys something out of administration, but this situation might be different. ASOS’s market valuation is not rock bottom but it is certainly still cheap given that its recovery story remains in the early days and there are still considerable risks to earnings.

“Travis Perkins’ warning caused ripples across housing-related companies on the stock market, with select housebuilders, DIY retailers and building materials suppliers falling in sympathy. Interest rate hikes have already caused cracks in the housing market and there are fears things could get a lot worse.”

Tesco

“Every little helps: news from Tesco it is seeing early signs of price rises starting to slow will be received gratefully by households feeling squeezed on all sides.

“It may also help reduce some of the recent political pressure on the sector as the finger was pointed at the supermarkets as one of the culprits behind the soaring cost of a weekly shop.

“Given the UK groceries sector has steadily reduced the proportion of people’s outgoings which go on food over several decades and these companies still generate razor-thin margins this charge always felt a bit of a stretch. However, politicians do not always make rational decisions and talk of price controls had been floated.

“Perhaps supermarkets have been a bit sluggish in passing on falling wholesale costs, with inflation still the main driver behind Tesco’s sales growth. In other words, it is not seeing growing volumes and that helps explain why the company is not upgrading profit forecasts despite the strong sales performance.

“The company’s scale continues to provide benefits and it is largely defending its leading market share position, while its wholesale business Booker is continuing to perform strongly.”

Travis Perkins

“John Carter, when he was boss of Travis Perkins, used to say the health of the housing market was far less important to the business than repair, maintenance and improvement (RMI) demand for existing homeowners.

“His argument was that you don’t need a sale or a purchase of a property to spend money with the builders’ merchant, and that RMI demand was less governed by the direction of interest rates.

“He also said new build homes were more of a sideshow for Travis Perkins than existing housing stock, calling work for the big housebuilders ‘padding’ and not that profitable.

“While Carter is no longer chief executive, it’s clear from Travis Perkins’ latest trading update that his argument would not stand up today.

“In its profit warning, the company cited weaker volumes in new build housing and private domestic RMI markets being affected by higher interest rates, together with weaker consumer confidence amid high levels of inflation.

“During the pandemic, countless households splashed the cash to do up their property, given they were spending so much time at home and wanted it to look nice. This caused a backlog of work for builders, hence why the boom lasted way beyond the easing of the pandemic.

“Sadly, we’ve got to the point where interest rates have gone up so much, so fast, that many homeowners can no longer afford home improvement projects. For many, mortgage payments have become punishing if they’ve rolled off a fixed rate deal in the past six months or so, and others are watching their pennies closely for fear that rates aren’t going to fall back any time soon.

“Yes, there continues to be a shortage of housing in the UK, but more important to Travis Perkins now is the ability and willingness for the consumer to spend money. A more resilient economy is helpful, but pressures on family finances may not ease for a while which means the builders’ merchant needs to be more realistic on earnings expectations.”

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