Tesco and Rolls-Royce

“The FTSE 100 stubbornly refuses to make any real progress with the index on track to make minimal gains this week. On Friday morning it was flat at 7,763. So far this year the FTSE 100 is up by a little less than 1%. Large gains between March and May merely recovered the losses experienced earlier in the year,” says AJ Bell Investment Director Russ Mould.

Tesco

“Tesco’s turnaround story continues to gain traction with the key performance metrics mostly pointing in the right direction apart from ongoing weakness in Asia.

“In particular, the acquisition of Booker so far looks like a good move. Strong sales in the wholesale business provide a new energy source for the enlarged group. It has wasted no time in using spare distribution capacity to house products from Booker so it can service orders faster.

“The latest market data from Kantar Worldpanel shows that Tesco remains streets ahead of its competitors with a 27.7% grocery market share in Great Britain.

“The fact that chief executive Dave Lewis has found a way to revive a very large business and make a large acquisition to enhance the group strategy would suggest that he is a major asset to Tesco.

“It is also encouraging that he has strong support in the form of Booker’s former chief executive Charles Wilson who is now Tesco’s UK and Ireland boss and considered to be one of the best in his field.

“Both individuals are viewed as very strong managers and Wilson is widely tipped as an eventual successor to Lewis as group chief executive.

“After previous setbacks with strategy and profit mishaps, investors now seem to have regained confidence in the supermarket and are singing the praises of Tesco’s Chas and Dave.”

Rolls-Royce

“There has been plenty for shareholders in aircraft engine maker Rolls-Royce to digest in recent weeks. In addition to safety inspections on its engines, reported job cuts and confirmation of those job cuts, it now says the business is well placed to exceed free cash flow of £1bn by 2020, prompting a big share price surge.

“The confidence of chief executive Warren East and his team comes after a decade of investing heavily in its civil aerospace business to secure a leading position for its engines in the passenger jet market.

“For all the criticism of former management, and there is no question Rolls-Royce endured a troubled period before East took over in 2015, they deserve credit for leaving this legacy.

“The company does a good job of laying out what improved cash generation will mean for individual shareholders over the longer term, with an ambition to generate more than £1 per share of free cash flow against just 15p in 2017.

“The best measure of a company’s ability to create value for its shareholders is delivering a return on capital greater than its cost of capital.

“And a targeted cash flow return on invested capital of 15% (compared with 9% last year) would likely be a long way ahead of the cost of funding the business through equity or debt.

“The company has laid out clear measures of performance upon which this management team will be judged. Now it is time to deliver.”

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