FTSE 100 lower, luxury sector in a funk, big change for Reckitt, Tesla disappoints, mixed results for Alphabet and Aston Martin reaffirms guidance

“The FTSE 100 was lower after disappointing corporate results in the US and a lacklustre session on Wall Street,” says Dan Coatsworth, Investment Analyst at AJ Bell.

“A volatile US presidential race presents an unhelpful backdrop for markets, with a first reading of US second-quarter GDP and the Federal Reserve’s preferred inflation measure later this week providing some insight into whether the ‘soft landing’ narrative still holds water.

“Weak results from LVMH and Rémy Cointreau suggest the malaise in the luxury goods sector is yet to abate and this puts further pressure on battered British fashion brand Burberry.

“The company behind the ‘Oscars of the advertising world’, Ascential has agreed to a takeover by fellow events and information services outfit Informa. The events sector has bounced back strongly from an enforced hiatus during the pandemic as businesses have relished the opportunities for networking at industry shindigs.”

Reckitt

“The big strategic change for Reckitt is finally here. Something had to happen given big mistakes in the past with acquisitions and operations. These setbacks have contributed to a sharp decline in the share price along with concerns over the quantum of liabilities around baby formula litigation.

“The appearance of multiple activist investors on the shareholder register implies that serious conversations have been held behind closed doors and Reckitt is now giving its response, laying out intentions to be leaner and keener. Activists owning the shares include Independent Franchise Partners, Asset Value Investors, Harris Associates and Franklin Mutual Advisers.

“Reckitt is one of the world’s biggest consumer brand companies and in a similar strategy to many of its rivals including Unilever, it is now planning to streamline and focus on the brands which have the best opportunities.

“Selling off non-core brands and simplifying its management structure could lead to higher group profit margins. The market has welcomed the news, sending the share price higher.

“In addition to putting some well-known brands up for sale including Cillit Bang and Air Wick, Reckitt has signalled it might offload the Mead Johnson nutrition business. This would draw a line under a very sorry episode in the company’s history.

“The $18 billion purchase of baby formula supplier Mead Johnson in 2017 was a disaster from the start. Reckitt paid far too much for the business and it ended up being a classic example of a ‘transformative’ acquisition – a giant deal which looked great on paper but destroyed value. Ultimately, it was an example of a company getting too greedy and thinking it could buy growth at any price.

“The focus now turns to whether Reckitt becomes a takeover target once it has completed the restructuring. Currently, prospective bidders might be put off by the potential liabilities linked to legal action around the safety of its baby formula products. Once there is clarity on this issue and the other non-core brands are sold, a more streamlined Reckitt would certainly look appealing to rivals, particularly if the share price stays at bargain basement levels.

“The stock recently traded on its lowest multiple of forward earnings since 2012. Trading in the region of 13 times earnings, this is roughly half its peak rating seen in 2020. It’s rare for a consumer brand powerhouse to trade so cheaply and it’s almost certain that trade buyers or private equity have the stock on their radar.”

Tesla

“Tesla’s financial performance is more erratic than a learner driver, having now missed earnings expectations for the fourth quarter in a row.

“The company always seems to be desperate to work on the next initiative rather than making sure the existing business is running smoothly. That raises the risk it is juggling too many things at once and not focusing on the bread and butter, instead preferring to look for another new toy to play with.

“There is a lot of talk about robotaxis, humanoid robots and autonomous driving, which provides an exciting narrative for investors but doesn’t get over the fact that these are tomorrow’s potential riches, not today’s. The stark reality is that Tesla’s profits have plummeted and that’s not what investors should expect from a business.

“Slashing prices certainly helps to address concerns about affordability, but that has led to lower profit margins. Plans are afoot to launch more affordable models and while that should make Tesla appeal to a broader group of drivers, it may still be a year or more until mass production of these vehicles gets underway.

“Tesla needs to find a better way to thrive in a more difficult environment for electric vehicles now rather than later. It’s clear that the pace of adoption is slower than expected – people still have concerns about battery range and whether there are enough experts to fix vehicles when things go wrong. Competition is also increasing and Telsa’s first mover advantage is fading away.”

Alphabet

“Alphabet is having to work harder to stay on top amid unpredictable corporate advertising demand and competition heating up in search and cloud computing.

“Another robust quarter shows the business has found the right ingredients to stay strong, but it hasn’t all been plain sailing.

“Investors were quick to find fault and the spotlight immediately shone on a slowdown in Google’s advertising growth at 11.1% in the second quarter versus a 13% gain in the previous three-month period, year-on-year. YouTube’s advertising revenue was also slightly below forecasts. That triggered volatility in the share price in after-hours trading, despite a strong showing from the cloud arm and overall earnings beating expectations.

“The fact the stock was down one minute, up the next, and then down again after the results implies that investors might be losing conviction in Alphabet. There are already lingering concerns about the Magnificent Seven and whether the best days are over for their share prices, at least in this point in the cycle. The past few weeks have shown signs we might be in the early days of a market rotation away from the mega cap tech names towards more value-orientated stocks.

“Advertising demand can be cyclical and the slightest bit of uncertainty around the state of the economy, strength of consumer finances or political upheaval can quickly make corporates scale back or pause spending on promotions. That is firmly at play at the moment, but Google is well versed in riding the ups and downs.

“More importantly, Alphabet needs to show it can deal with the competitive threat of ChatGPT with AI-related search functions and that it has enough muscle to battle Amazon and Microsoft on the cloud side. So far, it is holding up well on both accounts, although a lot can change at the click of a finger, particularly in AI where technological advancements are coming hard and fast.

“The group is still making decent strides in both advertising and cloud computing, and its enormous revenues and ongoing strategic achievements act as a reminder as to why so many investors turned to the titan of tech in recent years.

“Significant investment has gone into the business and the fruits of labour are now being realised. For example, there are lots of initiatives being rolled out which should help keep the company one step ahead, such as the ability to analyse images to obtain information and have better processing capabilities for cloud customers.

“It was also ahead of the curve years ago with YouTube and recognising the power of user-generated content. It is now reaping the benefits as the platform continues to grow.

“What’s clear is that Alphabet still has plenty of ideas for how to innovate and the financial strength to try lots of new things. Not everything will work, but its willingness and capacity to have a go is a major advantage. Beating earnings expectations for six quarters in a row also shows the business still has plenty of fuel left in the tank.”

Aston Martin

“Luxury car maker Aston Martin might finally be kicking into gear despite remaining heavily in the red.

“Investors were able to look past news of lower sales and higher losses as the company reiterated its second-half guidance. The company says it remains on track for a substantial uplift in production in the remainder of 2024. It is also delivering product innovation with new models proving to be well-received.

“While this has helped win the market over to some extent, the company needs to deliver now if it is to eradicate the scepticism built up over a disastrous showing in the wake of its 2018 IPO.

“Focus now shifts to the company’s ability to hit a target of positive free cash flow for the second half. Failure to hit this target will leave Aston Martin’s credibility in tatters again and lead to renewed concern about its borrowing pile.”

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