Investing Comment |
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Your Money > Investing Comment Articles > Wall Street, Main Street - High Street?
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By Richard Hunter, Hargreaves Lansdown
Amidst the global obsession with events in the US, as the bailout package continues through its "will they, won't they?" phase, the financial world continues to hold its breath ahead of the ultimate decision. Meanwhile, the real world carries on. Whatever the outcome of the deliberations within the House of Representatives, investors will at some point need to refocus on those factors which have been pushed to one side, but have not gone away. On both sides of the pond - and indeed, in other economic regions - concerns around slowing economic growth, the possibility of recession, inflationary pressures and weakening company results are still in evidence. As if by way of proof, two of the bellwethers of the UK High Street have recently reported updates which have basically slipped under the radar of the market, whilst attention has been turned elsewhere. Tesco (interim results) and Marks & Spencer (trading update) both came to the market with varying tales and degrees of success, and the general market view on both remains equally diverse. For Tesco, the news was positive, although certainly not outstanding by its own previous standards. The half year results again helped to underline the group's quality and defensive attributes. Underlying pre-tax profit rose by 10% to £1.45 billion - broadly in line with analysts' expectations - whilst overall company sales rose by 14% to £25.6 billion. Digging deeper into the numbers, and despite prior investor concerns, sales for the group's core UK market achieved the high end of management's own stated target range (like-for-like sales growth excluding fuel of 4% vs. management target range of 3-4%), whilst online sales grew (yet again) by an impressive 20.5%. The accompanying management comments were also broadly confident in tone, confidence which was underscored by an 11.6% increase in the interim dividend payment. In addition, headline International sales were helped by currency tailwinds, with like-for-like overseas sales marginally into positive territory (+1%). There was some interest surrounding the progress of the US expansion through the new "Fresh & Easy" stores, where the company stated that sales densities were building well. Given the current economic climate, investors look likely to give the company the benefit of the doubt, with the shares potentially profiting from their perceived 'safe haven' status. All things considered, the general market view towards the company remains positive, although not perhaps to the extent it has been in the recent past. A 9% drop in the share price over the last year may tempt buyers of the longer term story, whilst the company's defensive qualities should continue to shield it nearer term - Tesco has, after all, managed to post a 9% gain over the last three months as the wider FTSE100 has seen a 19% dip. For Marks & Spencer, however, prospects are somewhat different. Concerns about how weak the figures might be worried the shares, which drifted 9% in the week leading up to the trading update. This decline was completely reversed in early trade on the day of the update, since whilst the figures were not exactly glowing, they were not the "over the cliff" disaster which many investors had feared. Like-for-like declines in both general merchandise and food sales were broadly in line with already reduced expectations, whilst from an overall group prospective, overseas sales counterbalanced some of the deterioration in the UK - total sales were up 0.4%. Furthermore, management emphasised their tight grip on costs, whilst investment spending going forward is being curtailed. That said, profit margins are coming under pressure via increased discounting and the outlook for both the UK and global economies appears to be weakening almost by the day. For now, and despite a 66% drop in the share price over the last year, market consensus opinion currently denotes a weak hold. Useful links: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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