The stock market rose on Friday morning, thanks to the promise of more government stimulus. However, I think there’s another reason why some FTSE 100 stocks are climbing today.
Over the last few days, I’ve seen a number of different sources suggesting that trading conditions in China are improving. Here in the west, I think we need to remember the current crisis won’t last forever. Good business will eventually recover.
Today, I’m looking at two companies that should be well positioned to benefit from a China-led recovery.
This FTSE 100 firm is on sale
There’s no doubt things are tough at the moment for Intercontinental Hotels Group (LSE: IHG), which owns brands including Holiday Inn, InterContinental, and Crowne Plaza.
On Friday, FTSE 100-member IHG said average revenue per room was expected to have fallen by 60% in March. Similar declines seem likely in April and May.
IHG has nearly 6,000 hotels globally, but it hardly owns any of them. Most are franchised, managed by IHG, but owned by other companies.
In normal times, this enables the group to generate very high profit margins. When things are tough, it means the group’s liabilities are more easily limited. On Friday, IHG said it was cutting spending and has “significant headroom” in its bank facilities to allow for lower profits.
China is reopening
IHG shares are up 12% at the time of writing, thanks to this reassuring update. But I think there’s another reason to get excited about this stock. Management says only 60 of its hotels in China are now closed, compared to a peak of 178. More importantly, the company says that, “in recent days,” occupancy has started to improve.
I’m confident IHG’s hotel brands will recover from this crisis, both in China and globally. In my view, Intercontinental Hotels is a classy company with a strong future.
The market crash has caused the IHG share price to fall by 50% this year, leaving the stock trading on just nine times 2019 earnings. Management has suspended the dividend to preserve cash, but I’m confident it will return.
I reckon this could be a great opportunity to buy into a high-quality business.
Big spenders return?
Luxury fashion retailer Burberry Group (LSE: BRBY) says that around 40% of its global stores are currently closed. Management at this FTSE 100 company says that since 24 January, like-for-like sales in its stores have fallen by 40-50%.
Clearly, the situation isn’t good. But as with IHG, Burberry has a strong balance sheet with plenty of cash in hand. The group also enjoys high profit margins during normal times, thanks to its strong brand. This should make it easier to absorb a temporary collapse in sales. I see very little risk of a cash crunch.
A turning point?
There are also signs business in China may be starting to recover. Burberry says most of its stores in China have reopened and that trading is starting to improve.
In my view, now’s the right time to be buying stocks like Burberry. We may still see more volatility in the share price but, in my view, the risk of permanent losses will be pretty low for long-term investors.
If you’ve ever wanted to own Burberry shares, I’d buy them today — while they’re on sale.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Burberry and InterContinental Hotels Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.