I lost faith in March when CEO Antony Jenkins announced that he had run out of patience with the investment bank. I thought investors would eventually lose patience with him, but there would be much re-strategising and treading water in the meantime.

Mr Jenkins seemed a safe — and saintly — pair of hands when the bank was mired in multiple scandals. However, lacking the gall to either bring the American investment bankers to heel or spin off the investment bank wholesale, he resorted to salami-slicing it in the most value-destructive fashion imaginable.

I was premature in my analysis: incoming chairman John McFarlane lost no time ousting Mr Jenkins. So how will the latest management changes play out for investors?

Mack the Knife

Mr McFarlane installing himself as executive chairman is welcome news, certainly if he repeats the fantastic performance he pulled off in similar circumstances at insurer Aviva. Expect a forensic business-unit-by-business-unit strategic analysis, followed by ruthless disposal of ill-fitting units and a slash and burn campaign on costs.

True, Mr Jenkins had not one but two bites at the strategic review cherry and Project Transform was eminently sensible, but paraphrasing Barclays’ own announcements, he ‘lacked the skillset’ to do it fast (or effectively) enough.

It may not be much fun to work for a man whose nickname is ‘Mack the Knife’, but Mr McFarlane appears to have the ability to push strategic decisions through the treacle of middle management whose main raison d’etre in large organisations such as Barclays and Aviva is to preserve their own jobs and fiefdoms. Looking at the way Mr Jenkins was ousted — with deputy chairman Sir Mike Rake presented as having done the dirty deed — I suspect ‘MacHiavelli’ might actually be a better nickname for the new chairman.

Heavy lifting

So, as at Aviva, Mr McFarlane is likely to do the heavy lifting of re-positioning, and then install a competent CEO whose emphasis will be on implementation. That puts current finance director Tushar Morzaria in a good place to step up. With an investment banking background, he might have been the man to face up to the bigwigs of New York, but that didn’t work while he was in the number two slot.

Whoever Mr MacFarlane eventually chooses, it’s likely to be a strong leader who executes rather than debates. One of the most energy-sapping things in large companies is when senior management are constantly questioning and re-visiting strategy, which seems to have been the case under Mr Jenkins.

Indeed if a report in the Financial Times is to be believed, it was an argument over the future of the investment bank between Mr Jenkins and investment bank head Tom King that was the immediate catalyst for Mr Jenkins’ departure, with Mr McFarlane and Sir Mike siding with Mr King.

Sans the saint, Barclays’ investment bank might be viewed as more than just a PR headache. It generates an appallingly low return on capital but it needs fixing, not death by a thousand cuts.

Exit Sir Mike

The bungling of Sir Mike’s hasty departure is illuminating. It’s no surprise that a forceful executive chairman and a forceful deputy chairman (who missed out twice on the top job himself) decided they wouldn’t make comfortable boardroom neighbours. But after the news broke Barclays was forced to stress that Sir Mike would remain until a new CEO is installed. It seems managers at the Prudential Regulatory Authority were uncomfortable with Mr McFarlane ruling the roost with no restraining influences — they have read their Machiavelli, too.

Meanwhile the bank’s shares remain cheap, trading at a 10% discount to tangible net worth. Successful turnarounds need two things: a good underlying business, and good management. If Barclays’ new leadership can get the franchise working again, that share price discount should go to a premium.

The post Management Changes Make Barclays PLC Investible Again appeared first on The Motley Fool UK.

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

His reference to the Second World War is telling. It has become fashionable in some circles to regard investment in the defence sector as unethical. But if Britain had chosen appeasement rather than war in 1939/40, concepts such as ‘human rights’, ‘racial equality’ and ‘religious freedom’ would have been banished from the Continent of Europe.

Ploughshares don’t provide much protection when people come at you with swords.

A bit of Gracie Fields

So it’s perfectly right that investors should finance defence, much as their forebears bought War Bonds. And it’s right that they in turn make a profit when the firm that makes the thing that holds the oil that oils the ring that works the thing-ummy bob that’s going to win the war makes a profit.

Three prime examples are BAE Systems (LSE: BA) (NASDAQOTH: BAESY.US), Chemring (LSE: CHG) and Avon Rubber (LSE: AVON).

No longer officially designated as national champion, BAE nevertheless remains the go-to contractor for Britain’s fighting ships, submarines and armoured vehicles — though the US, 40% of sales, is more important to the company. A significant position in the massive, and massively over-budget, F-35 joint strike fighter will boost earnings when that finally comes into production. A PE of 12 and yield of 5% makes BAE a great cornerstone share.

Faded darling

Chemring is a faded stock-market darling and an excellent case-study in investment appraisal. The shares ten-bagged between 2003 and 2010, and then the wheels fell off in 2011 as the West’s withdrawal from Iraq and Afghanistan revealed that the company had grown too fast and acquired too much, without control of costs or cash. The stock became a classic value trap and is now worth a quarter of its peak value.

Chemring is well into a turnaround programme under new management who have slashed debt, costs and non-core assets, but it remains a speculative and risky prospect. Adverse ‘timing of orders’ recently pushed the company into negotiating temporary relaxation of Debt:EBITDA covenants – a warning sign on top of a warning sign. Nevertheless the maker of counter-IED devices and anti-missile countermeasures would directly gain from any renewed Western intervention in the Middle East.

Carry on Growing

Smaller, stronger and more specialised, Avon Rubber has dual niche businesses that could grace a 1970s Carry On film: making gas masks and rubber products for milking cows. Three-quarters of revenues come from the defence segment, where the company has cemented a market position supplying respiratory protection against chemical, biological, radiological and nuclear hazards to the US military.

With shares that have seven-bagged in the past five years, a strong balance sheet showing net cash and – by my calculations – an average return on capital employed of 33% over the past five years, Avon is typical of the small high-quality growth stocks that are under the radar of many investors.

Diversification is financial defence

That’s one large high-yield cornerstone share, one speculative mid-cap turnaround, and one small-cap growth stock. But the defence sector as a whole provides good diversification: it’s likely to benefit in circumstances where the equity markets generally are under pressure.

The post Why Bad News Is Good News For BAE Systems plc, Chemring Group plc & Avon Rubber plc appeared first on The Motley Fool UK.

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Tony Reading owns shares in BAE Systems, Chemring and Avon Rubber. 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.

But GSK’s CEO Andrew Witty has taken his company in a very different direction from Pascal Soriot at Astra. The two companies are no longer comparable, and it distorts the investment case to think of them that way.

The Unilever of healthcare

Mr Witty has de-emphasised the traditional big pharma strategy, whereby massive up-front investment in R&D aims to discover the next blockbuster drug to fund years of fat profits — most notably through the recent asset-swap with Novartis. He argues that Western governments will eventually baulk at the cost of healthcare for an ageing population, so the next generation of drugs won’t be so profitable. Perhaps the recent patent cliff scare also underlined the risky nature of prescription medicine.

So Mr Witty is emphasising global distribution of branded over-the-counter products and lower-margin vaccines, both of which play into growth in emerging market demand. Global consumer brands, low margins, emerging market growth, that sounds like the Unilever (LSE: ULVR) of healthcare. The two companies’ products even meet tangentially: there are markets where Unilever’s Signal toothpaste is up against GSK’s Aquafresh. The transition of GSK’s Horlicks from a Victorian tonic to India’s leading health drink mirrors the trajectory of Unilever’s Lifebuoy soap.

Biotech with a dividend

When Pascal Soriot took the helm in 2012 he committed AstraZeneca to just the science-heavy, R&D-led drug development that Andrew Witty is turning away from. Facing a steep and treacherous patent cliff, at the time I described Astra as like a biotech company with a dividend attached.

It still is, but three things have played to Mr Soriot’s advantage. To his credit, Astra’s scientists are delivering. Right now it’s creating a stir with immunotherapy, especially as a cancer cure. Secondly, biotech has become a fashionable sector. The thinking is that if you invent the drug, someone will pay for it. Thirdly, Pfizer’s aborted bid boosted Astra’s share price, which has remained elevated on the back of Mr Soriot’s bold confidence in Astra’s standalone earnings potential.

And the winner is…

Which of Mr Witty and Mr Soriot will eventually be proved right? The lesson for investors is that we won’t know until it’s too late. Investors shouldn’t stake too much on guessing what the future holds. Rather they should pick stocks — and plan portfolios — to suit their circumstances.

Personally I like boring but safe GSK. Stocks like GSK and Unilever, which offer bond-like security in their payout whilst locking in emerging market growth, make good cornerstone shares.

I’m wary of Astra’s valuation. Buoyed by lingering bid hopes, Mr Soriot’s big promises, and a biotech sector that could be in a bubble, I perceive bigger downside risk in the share price — but that’s countered by a bigger potential upside.

High yield

Both Astra and GSK offer good dividend yields, if little in the way of near-term dividend growth. That underlines their attraction to many investors, whether you want the income or want to re-invest and enjoy the compound growth in your holding.

The post Why GlaxoSmithKline plc Is More Like Unilever plc Than AstraZeneca plc appeared first on The Motley Fool UK.

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Tony Reading owns shares in GlaxoSmithKline and Unilever. The Motley Fool UK has recommended GlaxoSmithKline. The Motley Fool UK owns shares of Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

I doubt this review will herald any change. The US regulatory authorities will make it difficult. The UK will hardly play ball. China is too untested to host a global bank, and the markets would punish HSBC’s debt ratings if lacked a gold-plated regulator and lender of last resort.

Follow the money

But it is part of a pivot in HSBC’s mindset, with a management once desperate to escape Hong Kong now looking longingly back in its direction. If not this review or the next, HSBC will one day move back to its original home. It will inevitably follow where the critical mass of its business lies, and be one more manifestation of the shift of global wealth eastwards.

Within the next 15 years two-thirds of the world’s middle classes will live in Asia Pacific, according to the Brookings Institute. Meanwhile the US and Europe’s combined share will shrink from 54% in 2009 to 21% by 2030.

It’s not just a matter of where the majority of retail customers and wealth-creators live. Asia Pacific is home to the largest creditor nations — a fact underlined by the establishment of the Chinese-sponsored Asian Infrastructure Investment Bank, which prompted former US Treasury Secretary Lawrence Summers to say that this month may be remembered as the moment the US lost its role as the underwriter of the global economic system.

Three-quarters of capital markets executives polled by PwC think Asia Pacific will have a global financial hub to rival New York and London within five years. And Chinese investment into Africa and Latin America points to the future trade flows that HSBC will want to capture.

These tectonic shifts on global wealth and power have massive implications for investors.

It’s not an easy theme to play directly. “Invest in China” is a risky proposition, bearing in mind the history of certain Chinese companies on AIM, the speculative bubble in the Hong Kong stock market, and the potential for a hard-landing for the Chinese economy.

How to profit

The safest way to play this trend is through global firms that are investing to build market position in the region. Even they can have setbacks. GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) and Diageo (LSE: DGE) are prime examples. GSK found its sales force implicated in the endemic corruption in the Chinese economy, whilst ironically Diageo’s sales of premium drinks took a knock in the wake of president Xi Jinping’s anti-corruption drive.

It would be a mistake to fret over these short-term negatives. The real story is that GSK and Diageo are entrenching themselves in the major global markets of the future. Being relatively early-movers will serve them well in long run. Investors who want to gain from the rise of Asian wealth would do well to follow such companies.

The post The Real Reason HSBC Holdings plc Will Return To Hong Kong: Shareholders In Diageo plc And GlaxoSmithKline plc Take Note! appeared first on The Motley Fool UK.

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Tony Reading owns shares in HSBC, Diageo and GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline and HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

But it’s going to stay that way. That’s not-so-good news, but it’s not bad news. Shell’s share price is unlikely to grow dramatically but the company will keep on pumping out a large dividend, and that can make for a highly rewarding investment.

Mis-match

There are two fundamental reasons that explain why the market will never fully value Shell. First is a mis-match between Shell’s planning horizon and the City’s well-known short-termism.

Nothing highlights that better than the reaction to the company’s proposed acquisition of BG Group (LSE: BG). The response of the City’s teenage scribblers was to plug the numbers into their models and take issue with the economics of the deal based on the somewhat optimistic-looking outlook for oil prices predicated by Shell. Consequently, Shell’s stock dropped by 8% on the day the bid was announced, though it has recovered half that ground since.

From the perspective of a company like Shell, which works on planning horizons from exploration to production of decades rather than quarters, the deal makes strategic sense, and the timing was perfect. BG was a darling of those same teenage scribblers when it made some remarkably successful oil and gas discoveries. But it stumbled in bringing resources into production, its management got into a tail-spin, it suffered some unfortunate external hits in Brazil and Egypt, and the oil price fall hammered an already vulnerable stock price. Already with complementary businesses and assets, BG’s woes provided the ideal opportunity to fix a problem at Shell: its failure to replenish resources as fast as production.

But it’s difficult to put common-sense into corporate-speak. I’m not convinced by Shell’s oil price outlook or its expectation that the acquisition will be earnings-enhancing in 2017, but if it looks like a good deal, sounds like a good deal and smells like a good deal then I’m on board.

The tension between long-term planning and City short-termism plays out across the resource sector, but it most punishes companies when they are out of favour with analysts.

Overweight

There’s another, technical, issue that will hold back demand for Shell’s shares. The company is just too big. It’s already the largest constituent of the FTSE 100, making up 6.9% of the index. After consolidating BG, it will be around 9%. Even if institutions’ mandates allow then to concentrate more than 10% of their funds in just one stock, it’s hard to imagine many going much overweight. So there’s a natural cap on demand that will in turn put a damper on Shell’s stock price, however much it may be a screaming buy.

But that’s good news if you’re a dividend investor. Shell’s cash machine should keep on delivering a payout that hasn’t been cut since the Second World War. If the shares remain undervalued, then reinvested dividends buy you more shares.

Based on Shell’s intention to pay a $1.88 dividend this year and current exchange rate, then the shares are currently yielding 5.5%. Reinvesting those dividends would see the value of your holding double in 13 years, and treble in just over 20, assuming no rise or fall in the share price or payout.

The post Why Royal Dutch Shell Plc Is Undervalued appeared first on The Motley Fool UK.

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Tony Reading owns shares in Royal Dutch Shell and BG Group. 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.

On that same day, Greece is due to make by far the largest tranche of its debt repayments to the IMF, a massive €750m. If it can’t or won’t pay, Greece’s departure from European Monetary Union could become inevitable. Markets could take a dive as domestic uncertainty is compounded by turmoil in the Eurozone. It could look very nasty.

Black Tuesday?

It would be easy if we knew in advance that 12th May was going to go down in stock market history as Black Tuesday. But that’s only one possibility out of many, and so not a good reason to leave the market completely — though if you’re planning to ‘sell in May and go away’, it might be worth doing so at the beginning of the month. Most likely, the UK will form a stable government in fairly short order. Few would be surprised if Greece’s politicians manage once again to wriggle through the gap between the rock of its populist policies and the hard place of economic realities.

But to my mind the stars are aligned enough to warrant some cautious positioning ahead of mid-May. That means harvesting toppish holdings and carrying some cash, biasing my portfolio to defensive sectors and dollar-earners, and avoiding those easy tax-and-blame targets if a greenhorn administration presses the panic button. That’s underweight banks, then!

Standout defensive performers

The pharmaceutical and tobacco sectors were the standout defensive performers of the last financial crash. Between October 2007 and March 2009 they fell 15% and 17% respectively, against a near 50% drop in the FTSE 100. By early 2012 both sectors were well ahead of 2007 levels, whist the FTSE was still some 15% underwater.

My pick of big pharma is GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US). GSK’s scale gives it the R&D-spending power to be a winner in prescription drugs, whilst its vaccines and over-the-counter businesses provide stable earnings. The demographics of both the developed and developing worlds favour the sector and though the company stumbled in China, its early move into emerging markets should boost future revenues.

British American Tobacco (LSE: BATS) enhances its defensive characteristics with a diversified geographic exposure to compliment the addictive nature of its products. In broad terms revenues are split equally between Asia Pacific, Eastern Europe/Middle East, Western Europe and the Americas. That’s handy when one of the biggest risks to your business is legislation.

Another safe sector

Consumer staples also fared well in the financial crisis. Unilever (LSE: ULVR) (NYSE: UL.US) lost just a quarter of its value between 2007 and 2009, and by 2012 it was 30% up on 2007’s levels. Unilever’s broad global spread and global brand appeal bolster the robustness of its business, whist the company’s long-standing and entrenched position in many emerging markets — which account for 60% of revenues — offers prospects for further growth.

Most experts agree that it’s a mug’s game to try to time the market, but that shouldn’t stop you keeping a weather eye on developments and nudging the make-up of your portfolio accordingly.

The post 3 Stocks To Ride Out Mayhem In May: British American Tobacco plc, GlaxoSmithKline plc And Unilever plc appeared first on The Motley Fool UK.

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Tony Reading owns shares in GlaxoSmithKline and Unilever. The Motley Fool UK has recommended GlaxoSmithKline. The Motley Fool UK owns shares of Unilever. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Shell’s great timing

1. It boosts Shell’s reserves cheaply.
   Shell will increase its reserves by 25% and production by 20%. Exploring for oil and gas is expensive and risky. Buying someone else’s reserves is cheaper and easier — especially when oil prices are depressed and the target has encountered set-backs, as BG did;
2. It gets prime position in LNG.
   Both Shell and BG have invested heavily in integrated liquefied natural gas (LNG) businesses — getting the gas out of the ground, liquefying it and shipping it. The economics of LNG are different from oil, with cargoes easily transported to the highest bidder -and Shell will become the dominant player with a 16% global market share;
3. It gets a bigger foothold in Brazil.
   BG made big discoveries in Brazil’s off-shore pre-salt basin, but proved better at exploration than exploitation. Those reserves are complementary to Shell’s own Libra off-shore Brazil assets and its deep water expertise;
4. $2.5bn a year in cost synergies.
   There’s no doubt scale works in the oil industry so the mooted cost savings should be deliverable, if not exceeded. With a dual focus on deep-water and LNG, there will be plenty of scope to dispose of non-core assets;
5. A strong balance sheet means the prospect of share buy-backs.
   Shell’s low gearing means that pro-forma gearing of the combined group after the transaction is only 20%. Debt reduction will be a priority but if oil prices rise as Shell expects then it plans share buy-backs from 2017.

BG Group’s swift upside

1. A 50% share-price premium.
   With BG’s share price hammered by management mishap, emerging market politics and the oil price plunge, it would have taken a long time for new CEO Helge Lund to turn around the company’s fortunes. A 50% premium to the past three-month average provides swift recompense for BG shareholders;
2. Shell shares at good price.
   Shell’s own shares have been weak in the face of the depressed oil price. BG shareholders will likely look back and think this was a great time to become a Shell shareholder;
3. It dilutes BG’s Egyptian problem.
   With major Egyptian natural gas assets, BG became an unwitting victim of instability in the aftermath of the Arab Spring. Export production was cut off and receivables due from the State rocketed up to $1bn. A deal last month with the new Egyptian government looks promising, but nevertheless what was a major headache for BG becomes a minor irritant in the enlarged group;
4. It eases BG’s management challenges.
   BG shareholders seemed confident that expensive star-signing Mr Lund would turn around the company’s fortunes, but management turmoil and tight finances would have made the job more difficult. Instead the challenge will be integrating the two businesses;
5. Shell juicy dividends.
   Finally, BG shareholders will get Shell’s juicy dividends. Shell has confirmed it will at least maintain the payout for the next two years, which on today’s share price equates to a massive 6.5% yield.

BG shareholders lose the potential upside from the company’s fantastic record of discoveries, but they get a more certain cash flow in return. Shell’s shareholders get great assets at a great price. In the current circumstances, it’s a win-win.

The post 10 Reasons Why Royal Dutch Shell Plc’s Bid For BG Group plc Is Great News For Shareholders appeared first on The Motley Fool UK.

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Tony Reading owns shares in Shell and BG Group. 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.

Pharma is a good sector because it is both defensive and a play on demographics in the West and East. Fierce opposition to any threatened cuts in the NHS budget demonstrate how protective people are of health services even in times of austerity. A good slug of the money that flows into healthcare ends up in the coffers of the drug companies — in bad times as in good. That’s what makes a defensive investment.

Demand for drugs will rise and rise. In the West the baby-boomers have become the grey vote, living longer and demanding new treatments to keep them healthy in old age. In emerging markets the rise of a wealthier and more-demanding middle class will fuel spending on healthcare.

The oil sector is out of favour after the precipitous plummet in oil prices. That, for me, is precisely the reason to invest in it now. “I bought Shell (LSE: RDSB) (NYSE: RDS-B.US) when oil was $50″ might not prove to be as big a boast as “I bought Microsoft/Amazon/Google for $1″, but then it’s not such a big risk either. There’s a good chance of mean-reversion, i.e. the operation of market forces, pushing up oil prices eventually. But in any event Big Oil will adapt to the market conditions that prevail over its long-term planning horizons.

Top-down

If you adopt that top-down approach to investing, then the LSE gives you a choice of two big players in each sector. Diversification is a great thing so it can make sense to ride both horses – but for my money there’s a clear winner in each industry.

GlaxoSmithKline (LSE: GSK) has a robust business model, with lower-risk consumer healthcare and vaccines adding ballast to its patent drugs business. GSK’s scale is a big competitive advantage, enabling it to spend heavily on R&D as well as giving it marketing fire-power. The company’s investment in emerging markets should also pay off long-term, despite high-profile stumbles in China.

CEO Pascal Soriot has focused AstraZeneca (LSE: AZN) totally on R&D-led pharma. The company became a biotech play with a dividend attached. Then along came Pfizer’s bid and the share price rocketed. Astra has made significant progress in both its pipeline and its P&L, but the shares have been kept at lofty heights by management’s big promises. My fear is that any disappointment would see the stock punished along with management.

Dividends

Shell has been paying an ever-increasing dividend since 1945, so the 50% drop in oil prices over the past eight months is just a blip in its history. CEO Ben van Beurden has been cutting costs and capital expenditure, a process that could be accelerated if necessary to maintain the cash flow and payout. The US administration is poised to allow Shell to resume drilling in the Alaskan Arctic, which should augur well for its future reserves.

Meanwhile BP (LSE: BP) is still counting the cost of its oil spill in the Gulf of Mexico. The uncertainty of just how many billions of dollars in fines and compensation it will ultimately pay hangs over the company’s valuation. BP is also extraordinarily exposed to Russia: its 20% share in state-owned Rosneft accounts for over half its proven reserves of oil and nearly a quarter of its gas. That’s a double-whammy of risk. BP has a track record of being done over (Sidanko) and having close scrapes (TNK-BP) in Russia. Western sanctions now place the company between a rock and a hard place.

The post Why GlaxoSmithKline plc Beats AstraZeneca plc And Royal Dutch Shell Plc Beats BP plc For Your Last-Minute ISA appeared first on The Motley Fool UK.

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Tony Reading owns shares in GlaxoSmithKline and Shell. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Trash

To nonchalantly trash a programme format sold in over 170 countries that earns the BBC an estimated £67m a year, in the face of a petition bearing over one million signatures, is a luxury reserved for those whose income is funded by licence-payers who have no choice but to stump up.

BBC Creative Director Alan Yentob defended the sacking amidst claims that the BBC is run by a metropolitan elite by saying “there are quite a lot of programmes that reach out to audiences who are C2,D,Es…”. His contempt for the BBC’s working class audience was comparable with Gerald Ratner’s infamous rubbishing of his jewellery chain products, still remembered nearly 25 years on.

Consumer-facing commercial businesses can’t treat their customers with contempt, but rather need to be highly attuned to customer opinion. It’s especially important for companies that are high profile, and even more so when customer and shareholder groups overlap — analogous to the BBC’s situation. The varying fortunes of companies such as Tesco (LSE: TSCO), Marks and Spencer (LSE: MKS) and Whitbread (LSE: WTB) provide useful insights for investors.

Empire-building

Many observers would ascribe Tesco’s demise over the past three years to an arrogant and out-of-touch management regime that put empire-building above the customer. Tesco’s chairman admitted that “the company lost touch with the outside world”, and Morgan Stanley analysts pointed out that management was “obsessed about numbers”. True, the market changed with the rise of the discounters, but the market-leader could and should have responded quicker if it was in tune with customers. Only a change of management is now, perhaps, restoring the company’s potential.

Marks and Spencer has a mixed record. Long-known for superb customer service, its food division has thrived — despite the supermarket sector travails that so battered Tesco — by clever market positioning. The original ‘Dine in for Two’, which packaged a two-course meal plus wine for £10 in 2011, perfectly targeted the newly austere as they weaned themselves off dining out.

But around the same time in general merchandise — mainly fashion — M&S lost touch with its core 55-plus female customer base. Iconic M&S encapsulates the nexus of corporate and product branding: its 2012 AGM was beset by private shareholders demanding that the company stock more dresses with sleeves. This Thursday’s quarterly trading update will reveal whether the chain has finally reversed 14 consecutive quarters of sales decline in general merchandise.

Premium — and value

Whilst M&S shareholders have had a bumpy ride over the past three years and Tesco’s have grown poorer, investors in Whitbread have seen their stock rise by 80%. The shares’ premium rating — 25 times earnings — reflects earnings growth, which in turn mirrors its brands’ popularity with consumers. In contrast to M&S and Tesco, Whitbread’s corporate name is not linked with its high street brands, including Premier Inn, Costa coffee shops and Beefeater Grill. Indeed, the man in the street would more likely associate the company name with the brewing business that it shed in 2001.

Whitbread’s businesses are geared towards the value end of the price curve, though I doubt you’d catch a Whitbread executive doing a Ratner. The shares took off when Andy Harrison became CEO in 2010. He’s a man in tune with those who appreciate a bargain, having previously run budget airline easyJet.

Many sophisticated investors favour consumer businesses that have repeat sales of small value: there is greater earnings visibility than in businesses which have few, large contracts. But that approach only works if the management stay close to fickle consumer tastes. Ratners, and Tesco, demonstrate how quickly they can lose touch.

The post What Top Gear Tells Us About Marks and Spencer Group Plc, Tesco PLC And Whitbread plc appeared first on The Motley Fool UK.

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Tony Reading owns shares in HSBC and Tesco. The Motley Fool UK has recommended shares in HSBC and  owns shares of Tesco. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

If the competition authorities approve the deal, then O2/Three will leapfrog rivals Vodafone (LSE: VOD) (NASDAQ: VOD.US) and EE, which is being acquired by BT (LSE: BT-A) (NYSE: BT.US), to garner a combined 42% market share of subscribers. EE and Vodafone have 32% and 26% respectively. The EU apparatchiks who will sign off on the deal have approved similar reductions from four to three competitors in other countries, so are likely to give the green light.

The emergence of a bigger beast in the playground is hardly good news for BT or Vodafone. However, the reduction in the number of competitors is likely to be overall positive for operators’ margins, if not subscribers, much to the concern of consumer groups. What’s more there will be a differentiation in customer offering, with BT and Vodafone moving to bundle mobile with landline, broadband and Pay TV whilst O2/Three remains a pure-play mobile provider.

The sting in the tail

But there’s a sting in the tail that could seriously hurt one or the other of BT and Vodafone. O2 has a mast-sharing agreement with Vodafone, whilst Three has a similar arrangement with EE. It would be logical for a merged O2/Three to terminate one of these agreements and throw in its lot with either BT or Vodafone. The jilted partner will effectively see those network costs double, and will have to support on its own a cost base that its two rivals will share.

This is no small beer. When Vodafone and O2 sealed a deal to pool masts, towers and radio equipment into a joint-venture in 2012, telecoms consultancy Ovum reckoned it would reduce each firms network costs by 25%, saving £1bn overall by 2015. Espirito Santo said it would “significantly improve network quality, speed to market with 4G, lead to much better cash generation, and enhance returns on capital in the UK market for both companies”. EE and Three ramped up their alliance just last year, agreeing to jointly invest £1bn to build a shared core 4G network.

Painful break-up

The loser would take a hit on all those aspects cited by Espirito Santo — network quality, speed to market, cash generation and return on capital. My hunch is that Vodafone, with its rickety earnings and negligible free cash flow, would feel the pain of a break-up more than the robust BT.

Since its highly-profitable disposal of US associate Verizon Wireless, Vodafone has become something of a story stock. In Europe its prospects depend on whether management’s investment of the Verizon proceeds in acquisitions and Project Spring comes good. Its emerging markets business, where subscriber numbers dwarf Europe, is a long-term play on those margins growing as countries become more developed.

BT’s £12bn acquisition of EE and investment into Pay TV (copying Rupert Murdoch’s proven strategy of using sports as a spearhead) is similarly transforming that company, but from a more solid base. The 15% rise in its share price this year is testimony to investors’ faith.

The post BT Group plc And Vodafone Group plc Will Be Squeezed By This Mobile Merger appeared first on The Motley Fool UK.

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Tony Reading has no position in any 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.