FTSE bashed, Reckitt under pressure and Moonpig fails to bring the party

“A 1.2% decline in the FTSE 100 to 6,940 can be blamed on Reckitt’s disappointing trading update and weakness among mining stocks,” says Danni Hewson, Financial Analyst at AJ Bell.

“It’s no surprise to see Unilever fall in sympathy with Reckitt as investors are likely to be questioning the true defensive characteristics of these consumer goods companies. Yes, their products may be in demand during good and bad economic conditions, but that doesn’t mean profit margins can’t be squeezed.

“Sentiment has worsened towards Chinese companies after Beijing continues to flex its muscles. Hong Kong’s Hang Seng index fell 4.5% with some of the big tech stocks weighing on the index including delivery platform Meituan down 15% and internet giants Alibaba and Tencent both declining by approximately 8%. Those movements weighed on FTSE 100 investment trust Scottish Mortgage which has stakes in all three companies.

“It’s been a difficult year for investors in Chinese stocks due to regulatory interference. This has been an underappreciated risk for companies where most of the attention has been on the fast levels of revenue growth.

“Another bout of US companies will report earnings later today including Alphabet, Apple and Microsoft and a strong showing from them could encourage some investors to ditch Chinese tech names in favour of the more familiar US names. However, regulatory intervention also remains a big risk to this part of the market, as concerns grow over the largest players having too much power.”

Reckitt Benkiser

“For years, the market has assumed that big consumer goods companies had such strong brands that it was easy to pass on any extra costs to the customer in the form of higher prices.

“Unilever recently showed that wasn’t quite the case, and now Reckitt has also poured cold water on that theory. Its margins have taken a hit from higher raw material costs.

“Importantly, Reckitt says it will take time to offset inflationary headwinds with productivity and pricing actions. That might come as a surprise to people who might have thought it easy to slap on a 10% increase to the price of its products.

“To make matters worse, Reckitt has confirmed that disinfectant demand has weakened from peak-Covid levels. This was always a risk to its earnings, as a surge in demand during 2020 was linked to widespread consumer fears about catching the coronavirus.

“With lockdown restrictions now eased and so many people vaccinated, it is feasible to suggest that we will all probably clean more than pre-Covid, but not to the extreme levels seen at the height of the pandemic.

“Reckitt continues to show weakness, having previously made strategic mistakes with acquisitions.

“With consumers increasingly flocking to cheaper supermarket own-label products, the idea that the big brand owners are guaranteed sales success is no longer a given. Margin weakness only adds to the bear case for Reckitt.”

Moonpig

“Pigs might fly but Moonpig certainly hasn’t had a strong day following its first set of results as a listed company.

“While the shares are up on the price at which they initially joined the market, they sit well below their first closing level as initial excitement about the stock has ebbed away. Today’s results have gone down about as well as a novelty musical card would with parents on a kid’s birthday.

“The problem for Moonpig, which feels inevitable in hindsight, is that while these numbers show impressive growth, forward guidance is much less positive, reflecting the fact that, with rivals’ physical shops reopened, it is going to lose some of the market share it won in lockdown from being an online operator.

“And even for the year just gone, profit growth was a long way behind the expansion in revenue as Moonpig invested in its online services, including its app.

“Companies should be applauded for putting money into their business, however Moonpig faces an uphill task to convince investors of its long-term growth potential from selling more cards and gifts and getting people signed up to the app.

“The suggestion that Moonpig is a tech company has raised eyebrows in some quarters but the company’s use of customer data and predictive technology to remind people of key events may have to do some heavy lifting if it is to return to a growth path and get shareholders back on side.”

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