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.

sdf

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

Businesswoman calculating finances in an office
Investing Articles

In 12 months, a £10,000 investment in Lloyds shares could become…

Lloyds shares have soared more than 40% since the start of the calendar year. Can the FTSE 100 bank continue…

Read more »

Businessman with tablet, waiting at the train station platform
Investing Articles

Consider these 3 FTSE 100 and FTSE 250 shares for long-term rewards!

The UK stock market is packed with long-term investment potential. Here are three top shares to consider, including one from…

Read more »

Close-up image depicting a woman in her 70s taking British bank notes from her colourful leather wallet.
Investing Articles

£10,000 invested in Santander shares 5 years ago is now worth…

Our writer digs into surging Santander shares to see whether they might be a good fit for his passive income…

Read more »

Close-up as a woman counts out modern British banknotes.
Investing Articles

Low P/E ratios and 6%+ dividend yields! Could these FTSE 100 shares be irresistible?

These FTSE 100 shares look highly discounted at today's prices. Does this make them brilliant bargains or possible investor traps?

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

With a 30% increase since the start of the year, does the Barclays share price still offer good value?

In light of an impressive Barclays share price rally, our writer considers the attractiveness of the bank’s stock relative to…

Read more »

British coins and bank notes scattered on a surface
Investing Articles

How much passive income could we earn from UK shares with just £10 per day?

Even with modest amounts of money to invest, we can still consider investing in the UK stock market to generate…

Read more »

Night Takeoff Of The American Space Shuttle
Investing Articles

3 booming growth shares in the Scottish Mortgage portfolio

Our writer highlights a diverse trio of red-hot shares from the portfolio of Scottish Mortgage Investment Trust. Are any worth…

Read more »

Businessman using pen drawing line for increasing arrow from 2024 to 2025
Investing Articles

2 growth stocks absolutely smashing the FTSE 100

If you think the wider FTSE 100 is having a good year (and it is), check out the gains holders…

Read more »