As Prime Minister Theresa May starts work in her first full day in the job, it’s too early to say how the UK economy will be affected by Brexit.
Defensive strength an attraction
Car maintenance and cycle retailer Halfords said that total revenue rose 2.1% in the 13 weeks to 1 July, while like-for-like sales fell by 0.6%. Sales growth of 5.9% in the group’s Autocentres car servicing business was offset by declines in cycling (-4%) and car enhancement (-4.2%). Poor cycle sales in wet weather and a big decline in sat nav sales are to blame, according to Halfords.
However, the company was keen to emphasise that much of its revenue is “needs-based“. Motorists have no choice but to spend money on car repairs.
One risk is that most of Halford’s purchases are priced in US dollars. The firm says that 75% of this year’s expenditure is hedged, but if the pound stays weak then profits could be hit later this year.
I think Halfords is one of the better buys in the retail sector. The shares trade on a forecast P/E of 10.4 and offer a prospective yield of 5.2%. Any improvement in trading could deliver worthwhile gains for shareholders.
Ad spending puts pressure on profits
Shares in price comparison website Moneysupermarket.com rose 9% this morning after the group reported a 10% rise in sale for the six months to 30 June.
This is a business where the only real way to differentiate yourself from competitors is through marketing, which can be a drain on profits. Moneysupermarket said today that “additional marketing investment” meant that adjusted operating profit was expected to rise by just 6% to £54m for the first half of the year.
If profits are rising more slowly than total revenues, then this suggests Moneysupermarket.com is cutting its profit margins in order to attract new business and despite today’s surge higher, the shares are down by 20% so far this year.
They now trade on a 2016 forecast P/E of 19.2. With profit growth expected to slow next year, my view is that the shares are priced about right for now.
Emerging markets bounce back
Financial stocks with heavy exposure to emerging markets have suffered badly over the last couple of years. But they’re now starting to bounce back strongly.
Emerging market asset manager Ashmore Group said this morning that the value of its assets under management rose by $1.3bn during the second quarter. Investment gains of $2bn outweighed a modest $0.7bn outflow of funds as investors withdrew cash.
Ashmore doesn’t look cheap on 22 times 2016 earnings, but this year’s forecast profit of $107.5m is just over half the peak profit of $202.2m seen in 2013. If Ashmore can continue to deliver positive investment returns, investors are likely to add cash to the group’s funds. This could drive a sharp rise in fee income and lift the shares.
In the meantime, Ashmore offers a forecast dividend yield of 5%. My only concern is that this payout isn’t expected to be covered by earnings this year. A dividend cut is still a risk.
Could this dividend double?
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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Moneysupermarket.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.