Interactive Investor

Stockwatch: my response to results season so far plus tip updates

UK corporate results have been a mixed bag, with reason for optimism and alarm in equal measure. Analyst Edmond Jackson shares his opinion and rates several companies, including the housebuilders.

12th January 2024 10:31

Edmond Jackson from interactive investor

Company updates so far this year are mixed, with further examples of slowdown taking effect and the general stock rally since last autumn having broadly priced in prospects. 

Yet there is also the occasional special situation where stock values are enjoying a premium for this. 

Food retailers: reliable numbers but shares still fell 

It is a classic example of how strong underlying performance does not necessarily translate into rising equity, if anticipated beforehand. 

Sainsbury (J) (LSE:SBRY), Tesco (LSE:TSCO) and Marks & Spencer Group (LSE:MKS) generated positive headlines. In respect of food sales, third quarter 2023 updates showed Sainsbury’s up 8.6% “with stronger volume growth offsetting lower inflation”, Tesco up 7.3% and M&S Food up 9.9%

Yet Sainsbury’s equity has dropped 10% this week, Tesco is off 4% and M&S down 9% - as if investors are seeing through the numbers to recognise that inflation is aiding revenue growth, even if retail price increases have tempered from double to mid-single-digit percentages. Supposedly, Aldi and Lidl took share over Christmas with cheaper prices.

It shows any “cost of living crisis” is more a polarisation between those relatively affluent – enjoying inflation-linked (or busting) pay – and people on lower incomes. Mid-range retailers have cited strong sales of “finest” food ranges. 

Meanwhile, discretionary luxury spending appears to have been hit – with Burberry Group (LSE:BRBY) down 6% to 1,275p today following a profit warning. It cites “further deceleration in our key December trading period” against a backdrop of slowing luxury demand – hence 2023 profit below guidance. 

Two negative updates from recruiters are a concern 

Recruiters are often a tell-tale of economic conditions ahead, and reduced hiring is liable to filter through to consumer demand in three to six months’ time. It also implies hirers are less confident and need to cut costs.  

Mid-cap Hays (LSE:HAS) saw group fees down 10% in the final quarter of 2023 “impacted by a difficult December where fees fell by 15% - necessitating a profit warning. 

The damage was skewed to Australia and New Zealand, down 20% like-for-like and UK/Ireland down 17%; whereas Germany was flat and Rest of World off 11%. Not surprisingly, permanent recruitment bore the brunt, down 17% versus temporary 5% easier. 

It said: “Given increased uncertainties and reduced client/candidate confidence, our New Year ‘return to work’ is particularly important... it is too early to say if December’s weakness reflects a sustained market slowdown or some placement deferrals, however, we expect near-term market conditions to remain challenging.” 

Hays equity has fallen about 10% to 98p where it traded early last November (though it had visited 93p in October). Consensus is for a circa 25% drop in earnings per share (EPS) this current financial year to June, then a similar rebound in 2025 (albeit EPS would still be below 2023). On such basis, the forward price/earnings (PE) ratio is around 14x with a circa 4% yield covered over 1.5 times – fair enough, “hold” you could say. 

Small-cap Robert Walters (LSE:RWA) has mirrored this 10% fall in group fees in respect of its fourth quarter to end-December, albeit annual profit is still in line with expectations. Notably, the UK was its worst performer down 19% at constant currency, albeit representing just 15% of the group total. With Asia Pacific at 43%, this region was down a relatively modest 9% and other regions similarly. 

It appears recruitment of professionals in London is bearing the brunt, with activity more resilient in the regions. Walters’ CEO does not sound as foreboding like at Hays, saying “we remain confident in the long-term structural drivers that underpin demand for our services” although bosses are prone to say this in any cyclical downturn.  

Walters’ small-cap status may explain its relatively modest valuation: a forward PE around 11 times and yield of 5.5% with cover over 1.5x. Its stock actually firmed 3% to 420p in response to yesterday’s update, though had fallen in sympathy with Hays on Wednesday. 

If charts are meaningful, then Walters put in a “double bottom” around 350p last September and October.    

PageGroup (LSE:PAGE) is scheduled to update on its fourth quarter on Monday 15 January. 

Outlook for housebuilders still tricky to decipher 

Yes, mortgage interest rates are expected to fall, but it’s unclear quite by how much if wage-linked inflation proves persistent. Such hope got priced in over last November-December, making stocks exposed to any glitch in their narrative. 

Small-cap MJ Gleeson (LSE:GLE) kicked off updates rather disappointingly, cautioning of higher costs in context of 14% fewer homes built last year. Its stock fell in response but had jumped in days before after a New Year tip, hence at 469p is only off around 3%. 

I have liked Gleeson relative to other builders due to a strategic emphasis on low-cost housing, and management does anticipate a recovery in such demand. On a 12x PE and 3% yield I am inclined to a strong “hold” stance after a double bottom around 350p last year. 

Mid-cap Persimmon (LSE:PSN) has been a stand-out in stock terms, extending its rebound from 960p last October to near 1,500p after a trading update cited operating margins “in-line” at around a respectable 14% last year, despite a 33% fall in new home completions. Yet it has fallen around 50p since, as if controlled by edgy momentum traders.

The company’s vertically-integrated manufacturing facilities continue to support delivery and efficiency, and there was “a sustained pick-up in interest in our homes throughout the year.” 2024 has started with forward sales ahead of last year and, although “market conditions will remain highly uncertain”, mortgage rates are beginning to ease, a Boxing Day campaign generated substantial sales leads, and building costs continue to moderate. 

On a forward PE of 17x and yield just over 4%, this scenario looks broadly priced in, hence “hold” at best. 

Meanwhile, FTSE 100 constituent Taylor Wimpey (LSE:TW.) has barely seen any profit taking after it cited 2023 operating profit at the top end of guidance, although “the planning environment remains challenging and will continue to impact outlet openings.”   

At 143p, the forward PE is near 16x and a 6.5% yield assumes virtually all earnings being paid out. A “hold” if mortgage rates are genuinely easing but there is no scope for disappointments. 

Today, mid-cap Vistry Group (LSE:VTY), a mixed-tenure “affordable” builder, is up 2% at 990p after declaring 2023 ahead of guidance, albeit with adjusted profit flat on 2022. The forward sales position is up 12.4% and on a forward PE near 11x with a 5.0% twice covered, I would tend to prefer it as a “hold” versus other major housebuilders. 

Stock spikes on “better than expected” updates 

Trustpilot Group (LSE:TRST) has leapt nearly 20% to 170p, capitalising the reviewer website at £686 million. That’s over four times the £160 million equivalent revenue expected in 2024 when it’s tipped to report a maiden profit equivalent to £4 million (the company reports in US dollars).  

Revenue growth in 2023 was around 17%, with “additional operating leverage” in the second half. However, the update did not steer consensus away from a circa £0.5 million net loss.  

Trustpilot’s forward PE is over 500x, possibly reflecting its shareholders being extensively US - where people just do seem to support valuations well above what fundamentals imply. 

On more solid ground, I believe, Mears Group (LSE:MER) has leapt nearly 12% to 348p after this small-cap housing services group issued a “slightly ahead” update in respect of 2023 but raised guidance for 2024 from a profit fall to flat performance. On a forward PE of 12x and 3.6% yield I’d be more comfortable holding Mears than Trustpilot. 

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