It’s hard to say that the March Madness fully behind us, even as a busy month draws
to a close given that 29 March is – was – is – was technically Brexit day. However,
I won’t go into that here and will instead focus on the two major pieces of macroeconomic
news flow that are due out of the UK in the coming week. And they’re really inter-linked.
The first is the monthly GfK UK consumer confidence reading. In February this improved marginally
to minus 13, but that was still on a par with December 2017 and December 2013, so British
consumer don’t seem to think things are getting much better – which is something
to ponder, maybe, with retail and leisure stocks in mind for example.
The second is the latest monthly mortgage approvals data from the Bank of England. The
January number came in just below 68,000. That’s miles below the late 2006 peak of
127,000 and, perhaps more pertinently, represented a year-on-year drop of 0.7% - the thirteenth
such decline in the last 16 months.
Perhaps that reflects soggy consumer confidence. But I should point out that a sub-set of the
GfK data – the major purchase index – rose to plus 5 in February and I’d guess there’s
no bigger purchase than a house, so perhaps that reading offers a little more comfort
to mortgage lenders and housebuilders. Note from the second graphic here how year-on-year
growth in mortgage approvals and the GfK major purchase index seem to correlate to some degree.
Even if we all know that correlation does not mean causation, this could be a trend
to bear in mind if you take a look at the GfK and mortgage approvals data, which we
can see here, going back to the launch of Help to Buy in April 2013.
On the corporate front, we have a handful of trading statements, results announcements
and general meetings from FTSE 100 firms to assess, as well as a good range of releases
from small and mid-cap stocks to look out for.
Names to note include:
Utility Pennon and flooring provider (and serial dividend raiser) James Halstead on
Monday 25 March
Plumber’s merchant Ferguson, United Utilities, Michelmersh Brick and soft drinks phenomenon
Fevertree on 26th
Rightmove and housebuilder Bellway on the 27th
Eddie Stobart Logistics on the 28th
And finally legacy software specialist Micro Focus and struggling veterinary care provider
CVS on Friday 29th
But the company which could cause the biggest fuss in the week ahead just might be tobacco
giant Imperial Brands, which is set to release a first-half trading update on Wednesday 27th
March.
As we can see there, the stock was an awful performer in 2018 but it has rallied hard
so far this year
In fact, the tobacco sector currently ranks as the third-best performer among the 39 industrial
groups which comprise the FTSE All-Share index, with a healthy 19% gain outpaced by only Industrial
Metals and Technology Hardware.
You might think this seems odd given the doom and gloom that hit the sector so hard in 2018,
especially as two of the three big issues that weighed on sentiment last year have really
gone away, namely:
One, big tobacco firms are hemmed in by regulation on advertising, brands, packaging, you name
it. The result is that global stick volumes are shrinking, especially in the developed
West.
Two, regulators are already scrutinising next-generation products. America’s Food & Drug Administration
launched a crackdown on menthol and flavoured cigarettes and cigars to combat what it described
as an epidemic of e-cigarette use among teenagers in particular. In addition, market newcomer
Juul has been taking share in this area.
However, the third issue may be less pressing.
In 2018, consumer staples firms like tobacco stocks were dismissed as so-called bond-proxies.
As the Federal Reserve raised interest rates and US Government bond yields went higher
– peaking at around 3.2% - many investors sold yield stocks like Imperial Brands because
they could get a decent yield from bonds without taking the capital risk posed by shares. But
renewed growth fears and a pause in interest rate hikes around the world may mean that
yield-stocks are coming back into fashion again, with the US ten-year Treasury yield
back to 2.60%.
As this is only a trading statement, Imperial Brands is unlikely to say anything about its
dividend – though note that the firm has increased its shareholder distribution every
year since its 1996 stock market listing.
However, chief executive Alison Cooper gave some pretty clear guidance for this fiscal
year alongside last November’s full-year results, so keep an eye open for any comment
on the following points as Imperial seeks to deliver, over the long-term what it terms
“modest revenue growth, high margins and strong cash flows”.
Imperial is targeting revenue growth, on a constant currency basis, toward the upper
end of its 1-4% target range, with tobacco increasing and an acceleration from next generation
products
Operating profit, on an adjusted basis is expected to dip in the first half, against
last year’s £1.6 billion thanks to an additional £100 million investment in the blu next generation
product. However, Imperial still expects growth for the year full year – and adjusted operating
profit came to £3.8 billion last year, as we can see here in this graphic
Imperial is also targeting medium-term constant currency earnings per share growth of between
4% and 8%. We can see the progression here, with analysts forecasting growth of 4% and
5% for 2019 and 2020 respectively in the underlying numbers, although those estimates do NOT adjust
for currency movements:
Thank you for watching and I look forward to seeing you again next time.