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.

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.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

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.

More on Investing Articles

Portrait of construction engineers working on building site together
Investing Articles

Is this FTSE 100 stock the best housebuilder to invest in?

One FTSE 100 housebuilding stock has outperformed all of its industry peers by a big margin this year. Should I…

Read more »

pensive bearded business man sitting on chair looking out of the window
Investing Articles

2 cheap dividend growth stocks I’d buy as the economy sinks

I'm searching for the best bargains to buy following recent market volatility. Here are two top dividend growth stocks I…

Read more »

estate agent welcoming a couple to house viewing
Investing Articles

Here’s 1 FTSE stock primed to benefit from the current housing market!

With the current housing market as it is, Jabran Khan explores a related FTSE stock that could provide stable and…

Read more »

Portrait of construction engineers working on building site together
Investing Articles

Here’s why this AIM-listed stock could be one of the best shares to buy!

This Fool is looking for the best shares to buy. Despite macroeconomic issues, this stock could be a great long-term…

Read more »

Elderly father and adult son work in the garden
Investing Articles

This penny stock could be set to soar! Should I buy shares?

This Fool looks closely at a penny stock operating in an exciting growth market that could see its shares rise…

Read more »

Illustration of bull and bear
Investing Articles

The next stock market recovery looks imminent

As the stock market bear gives way to the bull, some stocks are already turning up and I'm ready to…

Read more »

Young mixed-race woman looking out of the window with a look of consternation on her face
Investing Articles

2 dividend shares to protect me from soaring inflation

Dividend shares can be an excellent way to keep up with inflation. Our writer explores several options to protect his…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

Is it time to buy Unilever stock?

Unilever stock has underperformed in the last five years. But with its portfolio of powerful brands, should I buy now…

Read more »