WPP suffers, Howden Joinery’s property challenge and Merlin bounces back

Archived article

Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

"The UK stock market has recently been acting like a rollercoaster in slow motion. It nudges up a tiny bit and eases back a tiny bit. Today the FTSE 100 slips 0.3% to 7,211," says AJ Bell Investment Director Russ Mould.

WPP

“The string of disappointing updates from WPP continues as it posts its worst set of numbers since the financial crisis and warns of no growth in sales in 2018.

"The company, essentially a conglomerate of lots of individual advertising businesses, plans to merge several of its agencies to create a simpler proposition for clients and strip out costs.

“The question for investors is whether the problems WPP is facing are cyclical and therefore temporary, which is WPP’s view, or reflect wider structural shifts in the industry.

“In any case all investors should probably take note of WPP’s weak performance. Advertisers are seen as good bellwethers for the economy because companies will increase spending on ads when they are feeling positive and scale back during tougher times. WPP offers particular insight due to its scale, breadth and geographic reach.”

HOWDEN JOINERY

“Full year results from kitchen seller Howden Joinery show a business coping fairly well in the face of tougher market conditions. Revenue was up 7.4% to £1.4bn but currency headwinds and additional operating costs served to pull down pre-tax profit by 2% to £232.2m.

“The key point about financial results is that they are backwards looking, and the stock market is forward looking. Therefore the market is looking for signs for what’s going on in the property market and comments from Howden on its outlook.

“Coinciding with Howden’s results today are new figures from Nationwide which show a slowdown in annual UK house price growth and a fall in prices over the past month. The building society says the slowdown is consistent with signs of softening in the household sector in recent months.

“Howden arguably needs a robust housing market as moving home is a key catalyst for ordering a new kitchen. It believes current market conditions are stable, although it remains watchful given ‘continuing economic uncertainties’.

“While the company has a good track record of managing costs in more difficult times, the direction of its share price will be heavily influenced by investors’ view of the UK property market and UK economic strength.

“Just look at the fact that builders’ merchant Travis Perkins, estate agent Foxtons and housebuilder Taylor Wimpey all saw their share prices weak on Wednesday as the market reacted negatively to all things related to the property sector.”

MERLIN ENTERTAINMENTS

“The impact of terror attacks in the UK, poor weather in Europe and criticisms over the company’s growth rates served to knock one third off Merlin Entertainment’s market value between June 2017 and February 2018.

“Expectations were understandably low leading into full year results out today. However, the business still managed to grow pre-tax profit in 2017, up 4.8% to £271m. That’s much better than the consensus expectation for no growth at all.

“The key challenge for Merlin is to keep investing in its theme park estate and keep the proposition fresh and exciting for investors, but not spend too much money so that it doesn’t make a positive return on this investment.

“A major focus at present is to invest in accommodation, thereby capitalising on an opportunity to make its theme parks more of an immersive experience. Getting guests to stay on site overnight increases their propensity to spend more money both in the evening and the next day.

“There’s nothing Merlin can do to control the weather, however it can take action to ensure its estate still appeals to consumers longer term. You have to spend money to make money, and the eye is definitely on the longer-term prize for Merlin, rather than short-term gains.

“It will be interesting to see how activist investor ValueAct starts to interact with the company and the demands it may make, having recently bought a 5.4% stake in Merlin.

“Activists can push for short-term gains which may result in a quick win for shareholders but that isn’t necessarily good for a business longer term if strategic plans get derailed.”

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