Why The Outlooks For Lloyds Banking Group PLC, Travis Perkins plc & Rolls-Royce Holding PLC Have Changed

The economy’s no help for Travis Perkins plc (LON:TPK) or Rolls-Royce Holding PLC (LON:RR), but what about Lloyds Banking Group PLC (LON:LLOY)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Analysing the UK economy — or more importantly, forecasting where it’s headed — is no easy task.

Policy makers have been trying to pull the economy away from one that is consumer driven, to one that is more balanced — incorporating growth from the manufacturing, construction and export sectors.

How’s that going for you?

Unfortunately, especially for the Tories, it’s simply not happening as well as was hoped for. In fact, it’s barely happening at all. Earlier, this week the Office for National Statistics produced data showing that the economy grew by 0.5% in the final three months of 2014. That’s actually down from the 0.7% growth recorded in the third quarter.

The problem is clear, the solution is not

It’s all very well to lower interest rates and ‘print money’ to stimulate the economy, but that stimulus has to penetrate through several layers of the economy. At the moment — as is the case in other parts of the world — it seems to be doing the world of good for the financial services sector, but not much else.

The construction sector, for instance, contracted by 1.8%. Travis Perkins (LSE: TPK) is a building products company and is obviously exposed to growth in this sector. The company’s already on a reasonably tight profit margin of 4.5%. It also has a P/E ratio of 17 and earnings per share growth of less than 1%. If the construction sector contracts further, it’s hardly going to be good news for investors in this stock.

Then you have manufacturing. It grew by just 0.1% last quarter. That was its worst performance since the start of 2013. Manufacturing companies around the world have been hit hard in the wake of the Great Recession, but Britain’s manufacturers have been hurt particularly badly. There are several reasons for that but two reasons include the fall of the Eurozone economy (Britain’s major trading partner), and the strength of the pound. Sanctions imposed on Russia have not helped either.

Rolls-Royce Holding (LSE: RR) (NASDAQOTH: RYCEY.US) has been a casualty of this. After putting on a brave face in 2014, it recently fronted the public to say, “Group underlying revenue will be in the range of plus or minus 3% and profit in the range of plus or minus 3% compared with our expected outcome for 2014”. It’s hard therefore to see conditions improving significantly for Rolls-Royce in the short-to-medium term.

Uncertainty

The manufacturing, construction and export sectors also benefit greatly from certainty. Analysts have repeatedly said the upcoming general election is one of the great sore points for the economy (and the market) because it represents so much uncertainty.

So where is the money?

As I mentioned earlier, one sector that seems to be doing okay is the financial services sector. That includes the banks. In particular, this Fool sees very little room for a rate rise in the foreseeable future, which is good news for Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) — which controls much of Britain’s housing market. I won’t make any comments as to whether the property market actually needs further stimulus, but I’m sure Lloyds’ executives won’t be complaining about it.

The British consumer is still using the British financial services system, and the system is making money, so investors will benefit from that. Assuming the economy doesn’t go backwards from here, it’s also reasonable to assume that Lloyds’ profit margin will benefit when Mark Carney finally decides to raise interest rates.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

David Taylor has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »