Must read weekly preview: Barratt Redrow, Ocado, Burberry, Netflix

Barratt Redrow – Full-year trading statement – Wednesday 15 July  

Richard Hunter, Head of Markets, interactive investor says, “Barratt Redrow (LSE:BTRW) is adapting its strategy given a challenging wider backdrop, continuing to move the levers within its control to protect its profitability and financial strength. At its third-quarter update in April, it announced an even more disciplined approach to buying land. It now estimates that it will purchase between 7,000 and 9,000 plots this year, as opposed to its previous guidance of between 10,000 and 12,000 at a cost of £700 million to £800 million, previously estimated between £800 million and £900 million. However, this has a positive side effect on the expected level of net cash at the end of this year, now guided as a range of £550 million and £650 million, versus the previous £400 million to £500 million.

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The trading situation is also being helped along by the £100 million projected cost synergies from the Redrow acquisition being on track, with £20 million achieved last year, £50 million likely this year and the £30 million balance following next year.

This also provides additional insurance for shareholder returns, where its £100 million share buyback programme is ongoing. In addition, and despite previously halving the dividend, the current yield of 6% is a clear invitation to income-seeking investors, even though a proportion of the increased yield is a natural result of a lower share price. The trading statement could provide the opportunity for Barratts to reiterate previous guidance for this year, such as adjusted pre-tax profit and completions to fall in a range of 17,200 to 17,800 homes. Even so, adjusted margin could remain under pressure as the current level of build cost inflation and sales incentives continue to erode some of the group’s profitability.

Seen through the prism of the long term, there are any number of positive building blocks which should serve the sector, and in turn Barratts, well. There remains a supply imbalance for homes in the UK which will ensure ongoing demand, the government is looking to ease planning regulations, and at some point the estimated trajectory for interest rates will be revised downwards, which should also encourage new buyers.  

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However, in the current environment, a significant rerating of the sector is difficult to envisage, which would inevitably lead to there being a lid on share price appreciation. There is the possibility of a lacklustre spring and summer selling season, with mortgage approvals down, stifled demand from stamp duty changes and the uncertainty surrounding the housing policy of the new Prime Minister.

The latest thorn in the sector’s side was an announcement at the end of June that a class action seeking £4.5 billion compensation from seven housebuilders including Barratts was being launched, over claims that anti-competitive behaviour among those firms had led to higher prices for new builds had been charged between October 2015 up to June this year. As such, the shares have fallen by 33% over the last year, and by 60% over the last five years. Of course, this leaves an undemanding valuation and it seems that investors retain a conviction to look through the more immediate challenges and concentrate on the possibilities of a recovery for the economic cycle, reflecting the group’s prospects as a longer-term play.”

Ocado half-year – Thursday 16 July

Richard Hunter says, “Investors have long since lost patience with Ocado Group (LSE:OCDO), which has become known as a perennial “jam tomorrow” stock. There is little doubt that the underlying robotic technology for packing shipping orders is cutting-edge, impressive and efficient, with automated bots scuttling seamlessly within a preset grid. However, rolling out this CFC (Customer Fulfilment Centre) offering to partners has brought its own challenges, with the international expansion on which the group was relying failing to materialise in a meaningful enough way.

There have been some positive developments, such as in late May when the group announced a deal to develop the online business of Asda using the Ocado Smart Platform. Shares spiked on the day, with an aim of going live in early 2027, but to a large extent history continues to weigh.  

International partners such as Kroger and Sobeys have dialled back on their full commitment, with consumer demand having proved weaker than expected in many of the relevant regions. The Logistics business shows signs of promise while Ocado Retail, the group’s joint venture with Marks & Spencer, is heading towards profitability with the quality of the latter’s products tempting customers.

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Further expansion is being targeted and the group is also searching for cost savings to soften some of the existing blow, which leaves the group barely profitable despite rising revenues. The half-year numbers will provide another opportunity for Ocado to pleasantly surprise the market, but this has proved fruitless in the recent past. The shares have fallen by 26% this year alone and the 94% decline since the peak in January 2021 looks increasingly irreversible. Recent news that the CEO will be departing, albeit not until a replacement is found in time for the beginning of fiscal 2028, adds another level of uncertainty which could exempt even more investors from entering the fray.

Burberry Q1 – Friday 17 July

Richard Hunter says, “Burberry Group (LSE:BRBY) described the full-year results in May as a meaningful inflection point, and with good reason. This followed a previous annus horribilis which included the change of chief executive, suspension of the dividend and a first-half loss which sent the shares into a tailspin. However, the famous brand is regaining momentum, and for the last part of the year Burberry reported a further increase in sales which represents the sixth consecutive quarter of improvement since the new CEO was installed.

For the year as a whole, adjusted operating profit came in at £160 million, as compared to £26 million the previous year and higher than the expected £154 million, leading to a pre-tax profit of £49 million which swung from a loss of £66 million in the corresponding period. Group comparable store sales increased by 5% in the final quarter, boosted by sales in both the Greater China and Americas regions, where the group revealed 10% growth in the fourth quarter and 4% overall. The European region ended flat, with first-half growth offset by second-half declines as tourist activity reduced and the Middle Eastern conflict took something of a toll. For this year, annualised cost savings of £100 million are expected to become entrenched, and this will enable capital expenditure of £120 million as the group continues to invest selectively on the higher margin lines.

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The progress is being achieved by measures on any number of fronts, including the attraction of Gen Z customers despite intense competition, which not only is a vindication of the new “Burberry Forward” strategy but is also a promising sign of the brand remaining relevant to a younger generation. There is also a particular emphasis on the outerwear for which it has become traditionally known, which is currently outperforming expectations. The ongoing campaign to promote the line saw the benefit of extra success during the festive season, with both outerwear and scarves seeing double digit sales growth. 

The outlook comments were optimistic but not cavalier. Burberry fully recognises that the transformation is still in its early stages, and that of course the fashion industry can be a fickle business. At the same time, a brand which had moved away from its traditional British traits of heritage and innovation, which had such appeal to overseas buyers and particularly tourists with an aspirational and stylish look, still needs to be fully re-established.  

The inflationary impacts of the Middle East conflict, along with European tariffs announced by the US have tended to weigh on the luxury fashion sector, which in turn has taken some of the shine from Burberry’s performance of late. The shares have fallen by 18% in the year to date and are some 60% lower than the peak achieved in April 2023, despite some chequered progress since the appointment of the new CEO which enabled the group to rejoin the FTSE100 in September. However, there remains something of a mountain to climb, such that investors are ready to accept but are not yet fully convinced of a sustained recovery, as evidenced by a surprisingly downbeat reaction to the full-year numbers.”

Netflix Q2 – Thursday 16 July  

Victoria Scholar, Head of Investment, interactive investor says, “Netflix Inc (NASDAQ:NFLX) is among the most bought tech stocks on the ii platform this week ahead of its second-quarter earnings on Thursday.

It has been a challenging year so far for the streaming giant which has been grappling with the departure of its co-founder and chairman Reed Hastings, the collapse of its Warner Bros. Discovery (WBD) deal and a 20% slide in its share price year-to-date.  

According to Refinitiv, Netflix is expected to report Q2 revenue of $12.59 billion (£9.38 billion) up from $12.25 billion last quarter. Earnings per share is anticipated to hit $0.79 down from $1.23 quarter-on-quarter. Although last period’s earnings result was lifted by the WBD termination fee.

The FIFA World Cup which started on 11 June could be a headwind for Netflix in the second quarter, with football fans diverting their attention away from streaming content. That explains why Netflix is reportedly interested in obtaining the rights to the next World Cups in 2030 and 2034, according to CNBC. Netflix already won the rights to the Women’s World Cup in 2027 and 2031.

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Netflix has been looking to diversify beyond the highly competitive TV and movie streaming market, expanding into live sports and related content by securing rights to NFL and WWE broadcasts as well as The Rest is Football podcast, which covers the World Cup.

Shares in Netflix have struggled since the peak in mid-April and are down more than 40% over the past 12 months, making the stock much cheaper and more attractive on a valuation basis than they were a year ago. The analyst community is optimistic towards the stock in aggregate with a consensus ‘buy’ recommendation and an average price target of $114.39, up more than 50% from the current share price.

According to Refinitiv, there are 40 buys, 12 holds and 0 sells on the stock. However, some analyst teams have trimmed their target price on Netflix this month including Citigroup, Bernstein, and HSBC.”