Nicholas Hyett 5 September 2017
August is traditionally a quiet time for the stock market, as company management teams and city analysts take a break after July’s busy half year results season. However, this year has been a bit different, with a flurry of profit warnings keeping investors on their toes.
Shares that have seen dramatic falls in share price often attract attention from investors. Here we take a look at three that have done just that in August.
The table shows the FTSE 100 and FTSE 250 shares (excluding investment trusts) with the highest number of net buys (buys minus sells) among Hargreaves Lansdown clients last month. These are provided for your interest, they are not a guide as to how you should invest.
Investors should consider their own objectives and attitude to risk before deciding where to invest. If you’re unsure of the suitability of an investment for you circumstances please seek advice. Investments can fall as well as rise in value, so investors could get back less than they invest.
|Top 10 FTSE 100 shares||Top 10 FTSE 250 shares|
|Legal & General||Hikma Pharmaceuticals|
|Lloyds Banking Group||Marstons|
|Shire||Tritax Big Box REIT|
Shares listed alphabetically
*Demoted to FTSE 250 in most recent resuffle
**Demoted from FTSE 250 in most recent reshuffle
Provident Financial - a change for the worse
Provident's shares fell 57.6% in August, after a profit warning from the non-standard credit provider revealed a whole patchwork of horrors.
We already knew the Home Credit division, which makes small, short-term loans to lower income borrowers, was struggling. But it is now expected to make a loss of £80-£120m for the year. To put that in context, Home Credit delivered profits of £115.2m last year, 33.5% of the group total.
The division’s main activity is doorstep lending, where agents make regular visits to pick up small sums from customers. Historically these agents were self-employed, and usually local to the communities they worked in. However, in January Provident announced plans to employ agents directly, a model introduced in July.
The transition to this new approach has been a fiasco. More agents than expected have left the business, collections are currently running at 57%, versus 90% in 2016, and sales are around £9m per week lower than the comparative period in 2016.
Adding to shareholders’ pain was the revelation that subsidiary Vanquis Bank has been under investigation by the FCA for over a year. The investigation revolves around the Repayment Option Plan product, which contributed around £70m of revenue last year.
While the botched transition and FCA investigation have cost Provident its place in the FTSE 100, it would be foolish to write off the 137-year-old business. The group’s brands remain strong and it has long relationships with customers who will struggle to access credit elsewhere.
However, recovery could take some time, and the business that emerges will be smaller than in years past. The interim dividend has been scrapped and a full year payment is unlikely.
WPP - revenue becalmed by global headwinds
WPP’s profit warning was a less stressful affair for shareholders, although the shares still fell 8.5% in August.
Advertising has always been a cyclical industry, and despite weak sterling boosting profits, WPP’s underlying numbers suffered in the first half. A slowdown in global GDP growth has seen major consumer goods companies, which account for a third of the group’s revenue, rein back on marketing spend and forced WPP to trim guidance for the full year.
There are reasons to be positive though.
The faster-growing emerging market businesses continue to perform better than the wider group, supporting CEO Martin Sorrell’s strategy of increasing exposure to these parts of the world. The group also has an excellent track record of controlling costs, helping it to grow margins, while acquisitions mean revenue continues to move forward. Excellent cash conversion means all this is being achieved without significantly increasing debt.
As a result the group remains confident in its longer term target of raising margins to around 20%, and growing earnings per share by around 10-15% per annum.
Dixons Carphone – waiting for the iPhone 8
A variety of factors have conspired to knock Dixons Carphone's profit guidance, around 20% below previous expectations, with the result that August saw the shares fall 36.6%.
However, a lot of those headwinds aren’t as bad as they look at first glance. A £10-40m revaluation of renewables is both one-off and non-cash - it's an unpleasant surprise but shouldn't have long-term consequences.
Moving to a subscription-based charging method for the retailer-focused honeybee software package will have more of an impact but revenues should still turn-up, just later. Up front sales in the division have made performance lumpy in the past, so hopefully we’ll avoid repeats of Q1’s 24% revenue fall in the future.
However, news that UK consumers are hanging onto their phones for longer is more concerning. Currency movements will have made new phones more expensive, but since the same should be true in the electronics business, which is faring well, we suspect the lack of significant innovation in recent models is a bigger problem.
Unfortunately there’s not much that CEO Seb James can do about the lack of innovation in recent iterations of the iPhone and Samsung Galaxy. The group will have their fingers crossed that the soon-to-launch iPhone 8 can break the mould.
While cheaper online rivals remain a serious threat, we feel Dixons Carphone’s strength lies in the fact that it's the last man standing on the High Street. There are still plenty of customers who like to try before they buy, and don't mind paying a touch more if they get a bit of help from a friendly and knowledgeable store assistant.
If Dixons' in-store service is good enough to keep customers coming in and leaving happy, this could prove its trump card.
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