Oil prices in focus, Barratt hit by housing market troubles, WH Smith slips on travel growth slowdown and Darktrace trims margin guidance as it points to year of ‘two halves’

“If central bankers thought energy prices were an area they could relax on a bit, then the move higher through June has firmly disabused them of that notion,” says AJ Bell Investment Director Russ Mould.

“The extension of output cuts by Russia and Saudi Arabia through to the end of the year has helped oil prices regain the $90 per barrel mantle for the first time in 2023 and this is likely to add to inflationary pressures. It may force the likes of the Federal Reserve to keep interest rates higher for longer and this is helping to undercut the more comfortable narrative that the trajectory for rates is on the way to shifting.

“Markets are reacting negatively as we await the next decisions from the Bank of England and Fed later this month. The recent improvement in sentiment was always fragile and the cracks are now firmly on show.”

Barratt Developments

“The UK’s biggest housebuilder is a good bellwether for the wider sector so gloomy results from Barratt Developments are unsurprisingly dragging down the peer group. The costs of doing business are still rising while increased borrowing costs for consumers are hitting demand and house prices.

“Beset by planning issues too, Barratt is announcing marked reductions in its build targets for 2023. Unlike during the global financial crisis, the last time the industry was really shaken to its foundations, most housebuilders, Barratt among them, have fixed the roof while the sun was shining and have fairly robust finances.”

WH Smith

“In theory, WH Smith is highly leveraged to the travel industry. The more people get on a plane, train or bus, the higher the likelihood that the retailer’s earnings will go up. Its stores in transport hubs can charge more for food, drinks and other products as there isn’t a lot of competition and travellers either don’t have time or are unable to go elsewhere for cheaper items.

“Its latest trading update reflects the growth in travel activity and the fact it is winning market share. Travel is the key driver for earnings, not the UK high street stores which are cash machines for the business but are arguably ex-growth. Here, it’s all about trimming costs and offering a functional place to buy stationery, books and snacks.

“However, a sharp slowdown in the pace of sales growth for the travel arm has caused investors to worry, with the share price down 5% on the news. The first-half period a year ago was disrupted by Covid, which meant this year’s stellar growth in the same period arguably came from a low base. The second-half period a year ago was more ‘normal’ so it was harder to sustain the big year-on-year growth numbers seen in this year’s first half in the latter part of its financial year.”

Darktrace

“Bitter experience has taught investors to be suspicious of situations where a company expects a second-half weighting to its results – like the one Darktrace is pointing to in outlook commentary alongside today’s results.

“What typically happens is a quieter first half leaves the firm in question with too much to do to hit full-year guidance and the inevitable result is a profit warning.

“It’s understandable the market is not too enamoured with the AI-driven cyber security firm’s guidance for a year of ‘two halves’ with stabilisation followed by re-acceleration.

“The company also softened its margin guidance as it changed the structure of bonus payments to sales staff. Largely this is an accounting issue which has more to do with the phasing of profit than anything else – with sales commissions being paid in full upfront rather than just 50% of the sum being handed over at this point.

“Darktrace has had a volatile time as a public company – right from the start it was under pressure thanks to its associations with controversial tech entrepreneur Mike Lynch. Question marks over its transparency and a high-profile bear raid earlier this year also put it under the cosh.

“An independent audit of its accounts gave the company an apparent clean bill of health over the summer and it really needs a steady period of delivery to help win credibility with the market.”

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