FTSE 100 hits new record with investors in optimistic mood, Burberry shares return to Covid lows, Imperial Brands demonstrates pricing power, Experian impresses and Raspberry Pi to boost UK market’s tech exposure

“The market’s optimism is starting to look rather heroic. Despite higher than anticipated factory gate prices, US stocks made progress overnight and the FTSE 100 has followed this cue to reach a new record high,” says AJ Bell Investment Director Russ Mould.

“The next test of the prevailing positive sentiment comes tonight with US consumer prices data – overnight Federal Reserve chair Jerome Powell said he did not expect rates to increase again but this release is one of a number which could help determine just how soon cuts come.”

Burberry

“Burberry has been one of biggest victims of the luxury goods downturn and there are few signs that it is coming out of the other end. Margins have fallen and that means profits have taken a hit given no growth in sales. The wholesale operations haven’t done well, costs are going up and Asia has proved to be a problematic region for the group. A slump in sales in China, as well as the Americas, is bad news for Burberry as they are among the most important regions for the group.

“The fourth quarter was truly miserable and the pressure is now on to find a magic solution.

“Burberry might have the creative skills to come up with new fashion lines, but can it concoct the right ingredients for a turnaround without simply relying on heavy discounts to shift products? Discounting is seen as a desperate measure in the luxury goods space as it tarnishes the brand and ironically cheapens the appeal – keeping products out of financial reach to the mainstream is essential to maintain the exclusive status of those who can flash the cash and buy the goods. Once you discount it is hard to go back.

“Burberry’s share price has more than halved over the past 12 months and the stock now trades as low as the price reached when markets tanked as the Covid-19 pandemic brought the world to a grinding halt. If ever there was a chance for another luxury goods firm or private equity to pounce on Burberry while it is on its knees, it’s now. It is a screaming takeover target for someone who is able to look beyond current problems and recognise the true value of the brand over the long term.

“The UK has developed a reputation for being a pool of sitting ducks, waiting to be devoured by a predator as valuations are cheap or shares are unloved. One by one companies are being picked off and a bout of share price weakness is one of the classic scenarios whereby you can expect a takeover approach. For Burberry, it feels like the odds of a takeover are shortening by the day.”

Imperial Brands

“The addictive nature of their products means tobacco companies have pricing power and Imperial Brands has pulled this lever, with higher prices for cigarettes helping to offset a decline in the number being sold in the company’s first half.

“The harm caused by smoking means the sector is likely to remain under regulatory pressure – particularly in the West – and like its peers, Imperial Brands is aiming to mitigate this risk by diversifying into sales of so-called ‘Next Generation Products’ such as vaping and e-cigarettes.

“These are growing rapidly but they still represent a minimal proportion of group revenue and remain loss making. Traditional tobacco products are doing the heavy lifting when it comes generating the cash to underpin generous dividends and share buybacks.

“For now, these are just about keeping shareholders on board but eventually there may be impatience over a share price which has barely budged in five years.”

Experian

“There was a lot to like in Experian’s latest full-year results both from a short- and medium-term perspective. The credit rating group expects a boost from a modest improvement in economic conditions but is also proving a master of its own destiny through innovation.

“Inevitably, this involves the use of AI but also a full transition towards the cloud which will increase productivity and enable the company to offer customers a greater breadth and depth of insights. With spending on the cloud expected to peak over the next couple of years, financial results should benefit thereafter as capital expenditure comes down.

“Experian’s customer base really needs its services and, importantly, either can’t or don’t want to take the risk of getting them from elsewhere, underlying the importance of the business to its users.

“The application of technology can only further entrench Experian’s position and the significant cash flow the company generates in more mature markets can be funnelled into funding growth in other parts of the world.”

Raspberry Pi

“Confirmation that Raspberry Pi intends to list on London’s Main Market is fantastic news. The addition of an established, profitable technology company is exactly what the UK market needs to hopefully open the flood gates for more tech firms to list in London.

“The fact the general public will also be able to take part in the IPO creates a more level playing field for a broad range of investors to get involved if they wish.

“While Raspberry Pi is only a tiny player when pitched against the mega-cap tech names in the US, there are still plenty of characteristics which might pique someone’s interest. It has a large community of users, it makes money rather than simply being a bright idea that is not yet commercialised, and there is a strong social angle as Raspberry Pi has education built into its business model.

“That’s a good start yet investors will want to know how big the company could get, whether it pay dividends as a listed company, and what are the key risks. The answers will come in time, but the mere news of the IPO is enough to build on the goodwill that is surrounding the UK market this year thanks to the FTSE 100’s long overdue revival.”

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