Ocado rides high on M&S promise, G4S knocks back approach

Morning Note

The question every Ocado shareholder has is whether the M&S tie-up will deliver. The answer so far, just a couple of weeks into the partnership, seems to be positive. Forward demand is strong, and management say adding M&S products has increased the average basket by around 5 items.

We should question though whether the novelty of getting Percy Pigs in your online shop will last.

Retail revenues – pre-M&S – accelerated from +27% in H1 to +52% in Q3 as the shift to online grocery continues apace, with the number of orders on a weekly basis up almost 10%. UK grocery sales rose 10.8% in the 12 weeks to September 6th, according to Kantar, which indicates Ocado is significantly outperforming. Shares in Ocado jumped over 6%, whilst MKS rose over 5% to 110p.

Of course, Ocado shares don’t trade on such lofty multiples because it runs a successful UK grocery business, but on expected recurring revenue streams from international partners. These have been slow to materialise and there was no further communication in today’s update.

Earnings from international partners remain slow to emerge and in July management cautioned that EBITDA from International Solutions would decline due to ‘continued investment in improving the platform and building the business, and from increased support costs with launch of initial CFC sites’.

Despite this jump in retail revenues, management can only promise full-year EBITDA of £40m. The problem for Ocado is it takes a long time to get a return from building costly fulfilment centres, while Marks will find out that it’s very hard to translate online grocery sales into profits.

On those Kantar numbers, it is worth noting that growth in supermarket sales decelerated in August because of the Eat Out to Help Out scheme, with sales down £155m compared with the July period. Shares in Tesco rose, while those in Sainsbury’s and Morrison fell.

UK unemployment rises, UK Internal Market Bill moves forward

UK unemployment rose to 4.1%, in a clear signal that the labour market is coming under increasing strain. According to the ONS, the number of employees in the UK on payrolls was down around 695,000 compared with March 2020. The claimant count rose to 2.7m, which is an increase of 120% from March levels. Over 5m people remained in furlough in July – how many are coming back?

Boris’s internal market bill cleared its first hurdle in the House of Commons but 30 Tory MPs abstained, hoping to water it down. The EU retaliated by delaying its decision on allowing  the City to continue clearing billions of euros every day in derivatives. London dominates the market but Paris and Frankfurt would both like a larger slice – of course you cannot strip it out of London very easily so this looks more like the European Commission flexing its muscles.

GBPUSD was steady in the middle of its range around 1.2860 having struck a high at 1.2920 in afternoon trading yesterday. Support to be found on the recent lows put in around the 200-day EMA at 1.2750.

Europe struggles on the open despite strong session in New York

European stocks faltered a bit after opening in the green, indicative really of the whole summer. The Euro Stoxx 50 neatly shows how European blue chips have drifted since June.

US stocks pushed up yesterday, with the S&P 500 pushing higher by 1.27% and every sector in the green. The Nasdaq was up almost 2%. Tesla shares rocketed 12%, while Nikola was up 11% before plunging 8% in after-hours trade.

Nikola responded to the Hindenburg research note but it seemed to me to be a rather weak defence with the company’s own promo videos on YouTube served up as ‘evidence’.

G4S rejects Garda World bid

Elsewhere, G4S shares were a little weaker this morning but largely held yesterday’s gains after the unsolicited approach from Garda World. A lengthy statement this morning rejects the offer in no uncertain terms, with management saying that the ‘highly opportunistic’ bid significantly undervalues the business. They go on to outline a detailed financial case on why they should not be bought.

Whilst the 190p offer represents a 31% premium to the undisturbed 145p the stock was trading at before the news broke, this only really recovers pandemic-related depreciation and G4S is probably right to demand a lot more for solid business that generates about £7bn in sales annually.

Always interesting to see how a company deleveraging  (G4S reduced net debt to EBITDA from 3.27x in 2015 to 2.58x today) makes you more appealing to a leveraged buyout, in which GW is a specialist.

Stocks open weaker, gold reclaims $2k, M&S streamlines quicker

Morning Note

Stocks yawned a bit, but Wall Street rose to within a whisker of the all-time high in another sub-1% daily move. Crowding into the tech trade showed no signs of letting up as the Nasdaq jumped 1% to a fresh record peak even as the White House announced new curbs on Huawei to restrict access to chips.

Asian shares drifted a bit as the US pressure on Huawei again highlighted the risks to manufacturing and trade, while European stocks were weaker at the open after ticking up a bit on Monday.

Stocks calm, but trouble could be brewing

August remains calm but there may be trouble ahead. Market indicators are sounding a couple of alarm bells – not necessarily to retest lows of March but for a short and sharp pullback. The US stock market is only at all-time highs because of the Fed and huge fiscal stimulus; it does not reflect reality – so what you say, it never has. But forward earnings multiples of ~25x for the S&P 500 are less likely to survive for long than 20x. Put-call ratios are moving in a direction that often correlates to a reversal.

Moreover, Vix futures point to greater anticipated market volatility into the autumn as the US presidential race inevitably tightens. Uncertainty over the result will create angst and volatility. The market is way too confident that Biden will win, although if Trump pulls it off the market could rip higher.

A fresh stimulus package would be a major tailwind for stocks, but it’s going to be hard to get it done with the election looming. The market will have to pay attention to the real economy again. A sharp rise in US mortgage delinquencies to a 9-year high at 8.2% even as house prices and homebuilder confidence rise on record low interest rates should be a cause for concern. Consumer-driven businesses, about 70% of the US economy, will be in for a shock as stimulus cheques have ended.

European shares have underperformed since the March low but would be swept up by any US-led selling. Rising coronavirus cases on the continent is a worry for reopening and could nip the nascent recovery in the bud.

M&S announces fresh job cuts

There is more carnage on the British high street as Mark & Spencer announced 7,000 job cuts in the coming months as it speeds up its ‘streamlining’ process, by which it means slashing jobs, costs and the store footprint and catching up with the modern world of retail. Covid-19 has accelerated a lot of consumer trends and as observed before, it may be the catalyst required to make M&S finally wake up. Food sales rose well, while clothing & home was down severely but is improving.

It’s very hard to gauge exactly how well M&S is doing against the unique backdrop of the pandemic, but we can say that investors should welcome accelerated change given the starting point pre-pandemic. M&S has promised renaissance before and failed, but this time it could be different.

M&S food sales ought to be higher though – Kantar figures this morning show we’re spending a lot more on groceries and all the supermarkets are gaining. However, food price inflation of 2.9% again raises the stagflation alarm bells and underpins the sense that inflation, at least on a range of basic commodities, will rise.

Warren Buffett bets on gold

Gold got a lift from Warren Buffett’s bet on the metal and a weaker dollar this morning has sent prices racing back to $2,000 after clearing the 23.6% retracement resistance around $1980. Gold has further to go longer term but there is yet still a risk of a second corrective move lower within the bull market.

UK inflation slips, M&S profits slide, indices hold trading ranges

Morning Note

It’s widely accepted that the pandemic is a profoundly deflationary shock to the global economy. No surprise then that UK consumer price inflation slowed to 0.8% in April from 1.5% in March. In fact, the bulk of the decline was due to lower oil prices.

Schemes to keep the economy on life support continue to support purchasing power – it may take some months for inflation to bottom as the economy goes through a painful readjustment.  Input prices for manufacturers declined 5.1%, whilst factory gate prices were 0.7% lower.  What comes next is anyone’s guess, but inflation could be round the corner as central banks and governments deal with vast debts.

M&S sales drop, but cash flow better than feared

Retailers will be at the coalface when it comes to inflation. Big discounts are expected as shops reopen over the summer – better to clear the old lines than having a bunch of shorts and bikinis to scrap. Marks & Spencer has been a bellwether for the UK high street, but lately its crown has slipped.

Results today indicate it’s had a tough time coping with the pandemic – in the six weeks to May 9th clothing sales tumbled 75% , while food sales declined 8.8%. But management are happy that they’ve outperformed their Covid-19 scenario with £150m better cash flow after six weeks than they had feared. Dividends of course are out of the question – MKS will not pay a final dividend for 2019/20 and it does not plan paying one for 2020/21.

Overall full year profits before tax declined around 20%. Free cash has halved over the year to £225m and after tax profits were down 40%. We knew it was going to be tough for M&S, so the focus for investors is the transformation plan, which is accelerating with more cost savings planned. Covid-19 has accelerated lots of consumer trends and it may just be the catalyst required to accelerate Marks & Spencer’s transformation into a 21st century retailer.

In particular it looks as though M&S has learnt just how important online is – so it’s making its Ocado venture more central to the business, introducing 1,600 Clothing & Home lines to be available online via Ocado. Much smaller store footprint, more focus on food, leverage the Ocado platform – there is at last a lot to be said for the MKS approach. Of course, we’ve talking about Marks’ recovery and transformation plans for many a year.

The pound eased back from the day’s highs on the weaker inflation numbers, with GBPUSD retreating under 1.2250, eyeing a potential retest of yesterday’s swing low at 1.2220.

Stock markets soft as scientists question Moderna vaccine data

Wall Street snapped a three-day win streak after doubts were raised about Moderna’s potential vaccine. Some scientists asked by health news website Stat queried the data, or lack thereof. Stocks ran up against the bad news as energetically as they ran with the good. It just shows how the market is clinging to any kind of sort of good news.

European shares followed lower again on Wednesday. The FTSE 100 just held onto the 6,000 level yesterday but opened lower this morning. Basic resources, financials and banks were the leading losers. Indices are within recent ranges as the tug-o-war between the economic reality on the one side and the twin hopes of stimulus and scientific research on the other play out.

API data shows surprise draw, WTI clings to $32

Oil was steady in its recent consolidation pattern as API figures showed a draw on US crude stocks. Inventories fell 4.8m barrels in the week to May 15th, vs expectations for stockpiles to build by 1.5m barrels. EIA figures are due later today and are seen showing a build of 1.7m barrels. With WTI trading above $30 again shale producers are already seen coming back on stream, which could tilt the balance back towards oversupply.

Nevertheless, demand is picking up and shut-ins have resulted in a little more supply being taken off. Reports suggest Chinese oil demand has almost returned to where it was before the pandemic. WTI (Aug) is just about holding above $32 but has a look like it wants to pull back – EIA figures today may provide the catalyst.

The risk-off tone supported gold bulls, with prices making steady progress back to $1750, having struck a low of $1725 yesterday. The recent 7-year high at $1764 struck earlier in the week is the upside target.

The S&P 500 quickly retreated from the area of the late Apr swing high around 2954 and closed below the 61.8% retracement. Futures indicate it will open around this level.

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