Must read: Wall Street earnings, Bellway, Whitbread

US BANKS

Victoria Scholar, Head of Investment, interactive investor says, “US earnings season gets into full swing next week with results from the financial sector. On Tuesday, Q3 results are due from Citigroup Inc (NYSE:C), The Goldman Sachs Group Inc (NYSE:GS), JPMorgan Chase & Co (NYSE:JPM) and Wells Fargo & Co (NYSE:WFC), followed by Bank of America Corp (NYSE:BAC) and Morgan Stanley (NYSE:MS) on Wednesday.

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The higher for longer interest rate environment has been favourable for banks’ net interest income (NII), although there are concerns that this tailwind looks set to fade amid growing macro pressures and rate cuts from the Federal Reserve. Trading activity could be set for another strong quarter while investors will be hoping for confirmation that investment banking activity is making a comeback. Last quarter saw a surprise rebound in IB fees after a difficult period for dealmaking.

Investors in the sector have done well this year - the KBW Bank Index is up around 16% so far this year, outperforming the S&P 500 with the likes of Goldman Sachs and Citigroup faring particularly well.

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BELLWAY 14 OCTOBER

Richard Hunter, Head of Markets, interactive investor says, “While the housebuilding sector remains on shaky foundations, Bellway (LSE:BWY) provided some grounds for optimism at its last trading update in August, which should augur well for its full-year numbers.

Private reservations including bulk sales rose by 11.8%, build completions by 14% and at that time average house selling prices had risen from £308000 to £316000. In addition, the group had turned around a net debt position of £10.5 million to net cash of £42 million.

Even so, many hurdles remain in this cyclical sector.

An increase to stamp duty in April followed uncertainty which has been hanging over the sector, with affordability being a particular headwind. The speed and number of interest rate cuts is also in question which could affect consumer confidence and propensity to buy, while the proposed relaxation of planning regulations is yet to take full effect. A recent surprise decline in house prices and buyers holding back ahead of the Budget are also of concern.

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More positively, the levers which the group can pull are evident in terms of a strong land bank which exceeds 95000 plots, with proposed government reforms to the planning system a likely catalyst for some of this volume to be unleashed. Alongside this improvement is an expected rise from 10% to 11% in underlying operating margin.

However, for Bellway the share price tells the story. Recently improving conditions as evidenced in its latest update have led to a spike of 8% in the last six months, but this rally has been insufficient to prevent a decline of 20% over the last year.

WHITBREAD – 16 OCTOBER

Richard Hunter, Head of Markets, interactive investor says, “There was little for investors to cheer in the company’s update in June, even though it needed to be taken in the context of Whitbread (LSE:WTB)’s ambitious five-year plan.

The sale of its jewel in the crown, Costa Coffee to Coca-Cola in 2019 for £3.9 billion somewhat left Whitbread flying on one engine, largely reliant on its Premier Inn business. The situation was then compounded by the onset of the pandemic, and more recently the rise in interest rates and inflation, and therefore consumer confidence. Indeed, the shares remain down by almost a quarter since pre-pandemic.

The irony of the ravages wrought by the pandemic is that it provided Whitbread with some major opportunities given a structural shift in the sector. Many independent hotels went to the wall as a result and there was next to no new hotel construction activity, which opened up the market to the larger operators. This contributed to Premier Inn becoming the largest hotel chain in the UK, with a 12% share of total hotel room supply. In relative terms, Premier Inn has consistently outperformed the market since the end of the pandemic and continues to do so.

The strategic plan targets adjusted pre-tax profit of at least £300 million and some £2 billion available for shareholder distributions by 2030. It also aims to increase its hotel room estate to 98000 by that time, en route to its long-term target of 125000. Within the plan, the German operation is expected to be making a significant contribution, with adjusted pre-tax profit of £70 million emanating from what should then be 20,000 rooms.

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At just 8% of group revenues, it could be some time before Germany makes a meaningful contribution to profits, although it could be seen as the largest medium-term growth area for the group.

Despite the backdrop of a tough consumer environment, especially in the UK, the shares have managed a gain of 8% so far this year, although only 4% over the last 12 months. The group is nonetheless generally well regarded for its prospects and, if achieved, the strategic plan would mark a successful step-change.