Lloyds Banking Group
Shares in Lloyds Banking Group (LSE: LLOY) are down 12% over the past three months, causing the Treasury to announce that it would stop selling-down its remaining 13% stake in the bank. The suspension in the sale of Lloyds’ shares should be regarded as a major positive for its share price. It reflects the government’s view that shares in Lloyds are likely to rebound, and the reduction of the supply of Lloyds’ shares could act as a support to its share price.
Although Lloyds Banking Group still trades at 1.6x tangible book value, it has a return on equity (ROE) target of 13.5-15%. And, unlike other large UK banks, Lloyds is already close to meeting its ROE target. Loan losses are steadily declining and the bank’s cost efficiency ratio is below 50%.
Lloyd’s strategy to focus on the domestic market has been a major factor in the bank’s recovery, and the strong economic outlook for the UK bodes well for the bank’s domestic focus. UK economic growth remains relatively robust compared to the rest of the world, with today’s second quarter GDP estimates pointing to growth of 0.7%.
As soon as its legacy misconduct costs start to dissipate, Lloyds could become a very attractive dividend stock. With the bank seemingly content with its domestic focus, Lloyds does not need to retain much of its profits to invest in future growth, and management has stated an intention to return at least 50% of its earnings to shareholders.
Bank of Georgia Holdings
Despite the turmoil in emerging markets and weakness in the Russian economy, Bank of Georgia Holdings (LSE: BGEO) is showing strong underlying growth. Earnings growth appears to be accelerating, with its second quarter profits rising 23.5% in local currency terms. Even though economic conditions are worsening in Georgia, the bank’s net interest margin and its cost to income ratio have continued to improve.
But, there are also signs that not all is well for Bank of Georgia. Non-performing loans as a proportion of total loans rose 60 basis points on the previous quarter, to 4.1%. Georgia’s close economic ties with Russia is another negative factor, given the regional tensions between Russia and the West.
GKN (LSE: GKN) reported disappointing interim results last month. Underlying sales grew by just 1%, despite robust demand in civil aerospace and the increase in content supplied to each vehicle. Declines in defence and agricultural contracts had helped to offset much of the gains made elsewhere.
The company’s outlook remains positive though. It is looking to tap into growth markets, including the hybrid car and electric car markets and the aerospace industry. Last month, it announced that it was acquiring Fokker Technologies, a Dutch automotive and aerospace supplier for €706 million. As Airbus and Boeing are looking to encourage consolidation in the parts suppliers market, to reduce the complexity of their supply chains, GKN is also set to benefit from an improvement in its margins.
Lonmin‘s (LSE: LMI) problems started well before the recent turmoil in global stock markets. The miner has been dealing with high costs of production, ageing infrastructure and labour disputes for many years, and the recent fall in commodity prices have made things even worse.
Although Lonmin has said it is making progress with cost cutting, it appears to be too little too late. Underlying ash costs have fallen to R 10,499 per ounce, but a significant proportion of the miner’s current production is still unprofitable with today’s platinum prices.
Lonmin needs a sharp recovery in platinum prices to generate positive free cash flow. But, as the prospect of that happening is very unlikely, shares in Lonmin could have much further to fall.
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Jack Tang has a position in GKN plc. The Motley Fool UK owns shares of GKN. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.