Pendragon’s car crash update, outsider to lead Reckitt and Boohoo to benefit from summer rain

Wednesday, June 12, 2019 - 09:55

“It was good while it lasted – sadly the global market rally has run out of steam and stocks are flashing red again. US President Donald Trump continues to play hardball with China over trade talks which has dashed investors’ hopes of an amicable resolution,” says Russ Mould, Investment Director at AJ Bell.

“The FTSE 100 fell 0.4% to 7,371 with British American Tobacco and Reckitt Benckiser among the worst-performing blue chip stocks. Markets across Europe also traded lower, including a 0.3% decline in Germany’s DAX index.

“And protests in Hong Kong won’t have sentiment towards its market, with the Hang Seng dropping 1.9%."

Pendragon

“The car industry is being dented from all sides. Fresh from horrific figures that showed a 24% drop in UK car production during April, the biggest drop since records began in 1995, vehicle seller Pendragon has issued a car crash of a trading update.

“Guiding for its 2019 financial year to be loss-making, Pendragon is sitting on massive amounts of used car stock which it needs to offload. Margins are also lower than expected as it looks like prices are being slashed in order to hit volume targets. And costs are going up.

“Businesses like Pendragon operate like a tread mill. They need to keep sales ticking over in order to maintain their health. If something bad happens, they fall off the tread mill and become unhealthy.

“The used car market is highly competitive and Pendragon admits that it has been inefficient with how this part of its business has been run.

“You need to consider that this is coming from a new management team, implying that strategic errors were the fault of the old team. Mark Herbert took over as CEO on 1 April, having joined from Jardine Matheson, and Mark Willis became CFO a week later.

“They’ve done their review and are now laying out a plan to fix the business. Unfortunately market conditions are working against them and so it is likely to be a painful recovery.”

Reckitt Benckiser

“Given the company’s recent patchy track record, investors may be pleased to see an outsider chosen to lead consumer goods firm Reckitt Benckiser.

“Joining from PepsiCo, Laxman Narasimhan will probably have more leeway than an internal candidate to make bold changes when he takes over from Rakesh Kapoor in September 2019. This might include boosting investment in the business and its brands which has lagged Reckitt’s peers of late.”

Boohoo

“A stock trading on a premium valuation is always performing a bit of a high wire act, with the slightest wobble in performance often resulting in a big fall.

“Online fast fashion retailer Boohoo may therefore be breathing a sigh of relief that it has been spared a more precipitous share price tumble after reporting a slight decline in gross margin for the three months to 31 May and only matching rather than beating expectations.

“The lower margin reflects investment in its brands and the company continues to do a good job of identifying, marketing and providing its shoppers with the products they want.

“There were plenty of other bright spots in the update with guidance for full year profitability and sales growth maintained, net cash building and outlook comments sounding bullish.

“The company is in an enviable position compared with its high street rivals, many of which will be counting the cost of the recent wet weather.

“Web-based Boohoo should benefit as people stay at home to avoid the showers and shop on their devices instead.”

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


The daily market comment is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.