Today’s third quarter update from RBS (LSE: RBS) is somewhat mixed. On the one hand, its net profit increased to £952m, which shows that its turnaround plan is making encouraging progress. However, on the other hand this included the proceeds from the sale of its 20.9% stake in Citizens Bank, while RBS is also continuing to experience considerable regulatory costs as well as the cost of restructuring the business.
In fact, RBS spent £847m on restructuring its operations, as it seeks to become a stronger, more profitable business under non-government ownership. This cost includes the £190m spent in separating the Williams & Glynn business from RBS, which is a requirement under EU rules governing state aid. Meanwhile, its overall progress continues to be pegged back by provisions for litigation (mainly for mortgage-backed bonds) which amounted to £129m in the quarter and, with RBS being uncertain as to the future prospects in this space, more provisions seem to be likely in the coming months.
Looking ahead, RBS seems to be making slow progress with the planned reduction in size of its asset base and move away from investment banking. However, its shares continue to offer good value for money with, for example, them trading on a price to book value (P/B) ratio of just 0.9. Clearly, the bank’s turnaround will take time and there will be disappointments along the way. But, for long term investors, it remains a highly appealing value play, although its short term progress is likely to be frustratingly slow.
Meanwhile, Burberry (LSE: BRBY) is also enduring a mixed period of financial performance. Its sales have come under pressure in China, which is a key market for the business, as a result of the slowdown in the country’s growth rate. Looking ahead, this is likely to be a feature of Burberry’s short term outlook, but it benefits from having a very geographically diversified operation which should provide a degree of offset moving forward.
In addition, Burberry remains one of the most appealing global luxury brands and, in recent years, has become a true lifestyle brand with it now offering a range of male and female products, as well as more casual items. Although its short term performance is likely to disappoint, the strength of its brand and forecast growth in earnings of 7% next year mean that its price to earnings (P/E) ratio of 16.6 has huge appeal.
Similarly, Vodafone (LSE: VOD) is undergoing major changes, with the business investing heavily in its mobile offering across Europe. This is likely to improve sales and customer loyalty, with Vodafone increasingly moving towards an integrated media offering, as evidenced by its move into UK broadband. Although the sector is highly competitive, Vodafone has a vast opportunity to cross-sell its products moving forward.
With Vodafone’s shares having fallen by 3% since the turn of the year, it now offers a yield of 5.4%. This indicates that it is very reasonably priced and, with the Eurozone economy likely to be boosted by the current quantitative easing programme (and by further programmes if its short term performance does not improve), Vodafone’s Europe-weighted asset base is likely to benefit from increasing demand. Therefore, it seems to be a value play, rather than a value trap.
