With investors rushing to buy UK defence stocks, one FTSE 250 growth star stands out to me.

I just bought Qinetiq (LSE:QQ) for my SIPP as a long-term compounder.

Qinetiq paid £43m to shareholders in 2022/23. The dividend per share is double what it was a decade ago. But there’s more.

BAE the best?

BAE Systems is one of the biggest stock market gainers from the West’s move to aid Ukraine with military support. It’s Britain’s largest defence company, after all.

It remains the UK’s most-searched for stock in 2023, according to Google Trends.

But with so many investors throwing their cash into BAE shares, I see the £10+ per share price as too high. Now I’d have to pay 17 times annual earnings for BAE.

Instead, my eyes alighted on a company a fraction of the size. QinetiQ is a £1.8bn market-cap defence specialist with £1.6bn in revenue. It has a solid and growing dividend, and humming net profits.

A Common Wealth report cited by The Guardian found Qinetiq pays just 4.5% of its own research and development costs. The rest is shouldered by increasing UK government support for aerospace and defence companies.

That’s led to a chunky 23.2% return on investor capital, reporters wrote.

Breakups are tough

So what are the major risks? A takeover or buyout seems most likely to top that list. Those deals don’t always work out best for the private investor.

In 2019, the UK government waved through the £4bn sale of British aerospace firm Cobham to a private equity giant.

Two years later, AIM-listed TP Group was taken out by Science Group for a song. The US engineering giant Parker-Hannifin Corp snapped up the £1.6bn-a-year revenue Meggitt in 2022.

That cleared out some of the largest UK rivals to Qinetiq. But defence is a global industry with massive players.

Where the upside lies

Qinetiq is a multinational with divisions in the Middle East, Australia, and the US.

Chief executive Steve Wadey said on 12 September that the war in Ukraine led to growing interest in its key technologies. These include using laser energy to target airborne threats.

The Ministry of Defence (MoD) also noted something very interesting last year: “QinetiQ…have built a phase-combined laser with the ability in the future to scale fire-power levels”.

Intellectual property and patents are critical to defence companies’ ability to turn potential into profit.

Qinetiq says its dividends will rise from today’s 7.7p per share to 8.59p by 2025.

The company’s inconsistency in upping these payouts may have dampened enthusiasm in the past. But I see a change in strategy here.

It is one of only three firms invited by the MoD to Porton Down in November last year. There it took part in the UK’s first high powered long-range laser weapons trial.

Defence stocks will be critical to managing the uncertain world ahead. I spy a long-term growth and dividend opportunity here, and that’s why I bought Qinetiq.

The post I just bought this FTSE 250 defence star as war breaks out appeared first on The Motley Fool UK.

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Tom Rodgers has positions in QinetiQ Group Plc. The Motley Fool UK has recommended BAE Systems and QinetiQ Group Plc. 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.

The Scottish Mortgage (LSE: SMT) share price has taken a beating over the past year, down 33%. With inflationary pressures causing a weak economic outlook, investor confidence in stocks such as Scottish Mortgage has waned in 2022.

The investment trust has been a top performer over the past decade. And despite a 52-week low of 670p, the Scottish Mortgage share price is currently sitting at around 900p. Here’s why I think the stock could be a great long-term addition to my portfolio today.

Scottish Mortgage decline

As mentioned, this year has been nothing to write home about for Scottish Mortgage. With inflation spiking globally, including 10.1% and 8.5% for the UK and the US respectively, the trust has been in the firing line of this.

With a focus on growth stocks, some of its top holdings have seen large losses as investors have shied away from such businesses.

Its tech-heavy focus has also fuelled this downfall as the sector has seen a market correction this year. Combined, this has driven down the stock’s price.

Not all bad news

Despite this, it’s not all bad news for Scottish Mortgage.

For a start, the last month has seen the stock rise 13%, clawing back some of its recent losses. This could be a sign that investors are beginning to gain confidence in the trust once again.

Yet more importantly, what’s crucial for me is Scottish Mortgage’s long-term outlook. Sure, it’s had a tough year. However, management highlights that performance is judged over a five-year stretch. And therefore, short-term volatility is less of an issue to me. While past performance is no indication of future returns, the last five years have seen Scottish Mortgage shares rising 114%. Pretty impressive.

As a retail investor, I also deem the range it offers my portfolio to be vital. With one investment, I get a slice of stocks from a variety of sectors and countries.

What this essentially does is help offset risk. By owning a slither of each stock through the trust I’m avoiding the riskier play of buying its holdings, such as ASML, directly.

One issue I do have is its relatively large weighting in China. The nation recently reduced its medium-term lending rate by 10 basis points as data revealed a slowdown in consumer demand. With cracks starting to appear in its economy, this could spell bad news for Scottish Mortgage.

However, I still have faith in the Chinese economy’s potential to produce the ‘next big thing’. Scottish Mortgage has an eagle eye when it comes to finding high-growth companies that produce juicy returns.

I’m still buying

So, despite the near-term issues it may face, I’d still buy the shares today. I think from a long-term perspective its weighting in China has the ability to bear fruit. Add this to the diversity it offers my portfolio, and I’d happily open a position in the stock.

Trading at around the 900p mark, I’d buy Scottish Mortgage shares today and hold for the long run.

The post The Scottish Mortgage share price has suffered. Here’s why I’d still buy! appeared first on The Motley Fool UK.

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Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended ASML Holding. 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.

After its incredible 1,100% rise in 2020, NIO (NYSE: NIO) stock has hit the brakes. While 2021 saw a sharp slowdown in growth, 2022 has seen the stock pegged back by 36%. In the last 12 months, it’s down 45%.

This isn’t good news for NIO investors who, following 2020, may have thought the Chinese electric vehicle manufacturer was about to follow in the footsteps of rival Tesla.

However, now trading for above $20, will it be able to stay there and progress further?

The story in 2022

The main reason for NIO’s large fall this year is inflation. Rates have spiked globally. And as a result, many growth stocks have taken a hit. This isn’t uncommon in volatile times like these. And this is because investors look for ‘safer’ alternatives than these riskier equities. To add to this, supply chain issues and China’s zero Covid strategy have also halted production at times this year.

Despite this, the business still posted some strong results in Q1. Deliveries were up 28.5% year on year to 25,768, while vehicle sales rose nearly 25% to $1.5bn. Total revenues also grew by 24.2%. However, gross profit did fall by 6.9%.

Competition

More widely, an important factor regarding NIO stock is the heightened push to an electric world. And I see this taking one of two directions.

Firstly, it’s inevitable that more governments worldwide will expand their emphasis on a transition fuelled by renewable energy. It’s already been seen in the UK with a ban on the sale of petrol and diesel cars from 2030. And I’d expect moves like this to become common worldwide.

For NIO, this is obviously good news. With a larger push comes, hopefully, a rise in demand for its products.

However, it could also spell trouble. As the EV space continues to grow, there will naturally be a rise in competition. More established manufacturers such as Ford have already made bold all-electric commitments. Even higher-end manufacturers such as Porsche have electric vehicles available, while Ferrari has plans for 40% of its sales to be from fully-electric cars by 2030.

While NIO has seen tremendous growth in the past, this could slow as we see more of the competition targeting a slice of the lucrative market.

Despite this, NIO does have tricks up its sleeve that could keep it ahead of the curve. For example, its battery-swapping technology allows users to swap empty batteries for new ones in a matter of minutes. Should it keep producing cutting-edge technology like this, NIO may be able to keep ahead of competitors.

Where next?

So, where will NIO stock go from here?

Well, while it may be able to continue its impressive growth due to its innovative nature, I won’t be buying NIO stock today. As inflation continues to bite, I think it could slip further this year. With competition also looking like it’s going to heat up, this is of further concern for me. I’ll be keeping NIO on my watchlist for now.

The post NIO stock is above $20. Where will it go next? appeared first on The Motley Fool UK.

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Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesla. 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.

This year has been dire for Scottish Mortgage (LSE: SMT) shares. After a modest 4% rise in 2021, 2022 has seen the stock come tumbling down due to inflationary pressures. Year-to-date, Scottish Mortgage fallen 32%. The last 12 months have shaved 36% off its value.

However, the trust’s investors will be delighted with the last month as the stock has risen a solid 13%. Here’s why I’d buy the trust today.

The story so far

2022 has been far from easy for the trust.

The main contributor to the downfall of Scottish Mortgage has been the performance of its top holdings. This includes the likes of Tesla and Amazon. And with these stocks down 28% and 20% year-to-date, respectively, it’s clear to see why Scottish Mortgage has suffered.

The trust has a large focus on growth stocks. And these tend to fare the worst in volatile times as people opt for ‘safer’ alternatives. As interest rates are hiked to combat inflation, investors are able to get better returns on risk-free investments. As a result, these growth stocks miss out.

However, the last month has seen the trust fight back against these pressures. A large driver behind this is the rally its top holding Moderna has made in the last couple of months. With this rise, some may be beginning to regain faith in Scottish Mortgage.

Where next?

So, after a turbulent year, where will the trust head for the rest of the year?

I’m not sure. And to be honest, I’m not that fussed. The reason for this is because I buy for the long hold. Management makes it clear that Scottish Mortgage focuses on returns over a five-year period. While past performance is no indication of future returns, the last five years have seen the stock profit shareholders with a 109% return. This easily trumps the returns of its benchmark FTSE All World Index, showing the strength of the stock.

What I also like about it is the diversity it can provide for my portfolio. Under a single investment, I’m gaining access to over 100 companies. For me, this is perfect. An added bonus is the access I get to unlisted companies, such as the exciting SpaceX. Such holdings make up over half of the trust’s portfolio.

I’m also a fan of management’s ability to pick out stocks ahead of the curve. After all, Scottish Mortgage did buy Tesla back in 2013 for $6. For all I know, it could have the next big thing already in its holdings.

The biggest threat for it is rising interest rates. These are expected to be hiked further as we head towards the end of the year. And this will only continue to dampen the performance of growth stocks.

Yet despite this, I’d still buy today. With a long-term outlook, these short-term issues don’t worry me. The trust has proven its potential over the last five years. And with the diversity it offers my portfolio, I think this fall presents an excellent opportunity to buy.

The post The Scottish Mortgage share price is on the up! Here’s why I’d buy appeared first on The Motley Fool UK.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Charlie Keough has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon and Tesla. 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.

After all, ‘top’ can mean many things to different people. And frankly, if everybody thought the same way, then trading markets wouldn’t exist!

So, if I’m looking for good shares to buy, in what useful ways can I answer the question?

Does size matter?

When it comes to looking for great shares, is the size of a company important? For example, if I look at the FTSE 100 by market capitalisation, these are the top five shares:

Now, clearly it’s not a static picture, since market capitalisation is linked to a company’s underlying share price. But it’s an easy way to see who are the big boys (and girls) of the FTSE 100.

Why does size matter? Well, if I’m looking for shares that are relatively stable, then these so-called ‘large-cap’ companies are more likely to fit that bill. They tend to be mature companies in established industries.

That makes them potentially less volatile than other smaller shares, with the trade-off being they are less likely to experience huge growth ahead.

But that’s just one way of looking for the top footsie shares — what else can I see?

Highest dividend-yielding shares of the FTSE 100?

Another popular way of looking at the FTSE 100 is to try and find the best dividend payers. One simple way of doing this is to compare historic dividend yields, which gives me this top five list:

The main thing I must remember when looking at these high-yielding dividend shares is that history is far from guaranteed to repeat itself. Many companies cut or cancelled dividends during 2020, for example. Likewise, a high dividend yield can be a warning sign to check the underlying share price isn’t taking an unexpected dive.

Now, dividend shares are useful if I’m looking for income — but what if I’m still trying to grow my wealth?

What are the top five FTSE growers?

As a long-term Foolish investor, I’m interested in buying and holding shares for the next three to five years, at a minimum. And if growth is what I wanted, then these are the top five FTSE 100 shares I would have been delighted to buy five years ago.

These five shares are particularly interesting, since over that period, the FTSE 100 index itself has gone nowhere from a growth perspective.

They look great — unless you compare these growth figures to the wider FTSE 350, where none of these companies would make the top five.

So, what is the answer?

What are my top five FTSE 100 shares?

The most honest, if a little unsatisfying, answer to the question of the top five FTSE 100 shares is – “it depends”. I can ask the question in a variety of ways and get entirely different answers.

That’s why when it comes to looking for shares to buy, I need to be clear on what I’m really looking for — and why. Then I can start to research the best shares for me — and that’s what really matters.

The post What are the top 5 FTSE 100 shares? appeared first on The Motley Fool UK.

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Michelle Freeman has positions in Shell plc and Rio Tinto. The Motley Fool UK has recommended Diageo, HSBC Holdings, Ocado Group, and Unilever. 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.

Marks and Spencer (LSE: MKS) shares are down 40% this year. Despite that, the retailer reported excellent numbers in its most recent full-year results, with plenty of promise for the future. As such, I think a closer look at the company is warranted.

Hungry for more

After years of declining profit margins, Marks and Spencer launched its latest turnaround programme in 2020 under the Never the Same Again name. This bid to improve the brand’s image and business operations looks like it might be working. The FTSE 250 firm has posted an excellent recovery since, with improvements in customer perception of the M&S brand. As a result, M&S Food sales grew 10.8% year-on-year, while expanding its market share from 3.4% to 3.6% over a three-year period. This was also helped in part by its key partnerships with Coca-Cola‘s Costa Coffee and Ocado.

Additionally, the firm saw its operating margins improve in the second half of its financial year. Even so, I was impressed that the board is aiming to further improve its food supply chain through boosting efficiency and cutting costs. Thus, I expect its food prices to become more affordable, allowing it to expand its market share.

Getting the right fit

Marks and Spencer isn’t just its food business, however. One of the main reasons behind its poor past performance can be attributed to the company’s inability to keep up with the times, as far as its struggling clothing offer was concerned.

That being said, the Never the Same Again programme gave a breath of fresh air to the retailer’s clothing segment. Consequently, the division saw its sales figure jump 51.6% on the year and 3.8% against three years ago.

There’s also the positive effect of M&S’s investments in digital. With heavy competition from e-commerce giants and more nimble omnichannel retailers, Marks and Spencer was always going to struggle. However, enhanced investment has made its e-sales more market competitive. In fact, market penetration has almost doubled to 34%. This has been helped by around its 40 clothing brand partnerships. Moreover, the acquisition of Jaeger and The Sports Edit have added even more depth and variety to its offer.

A summer with Marks and Spencer

Since 2018, Marks and Spencer has reduced its debt levels by 12%. What impressed me most though, is its cash position, which has grown by a whopping 455%! Furthermore, profit margins are back to a healthier level of 2.8%, with free cash flow at £1.1bn.

Nevertheless, my concerns of a potential recession impacting sales are shared by the board. Having said that, CEO Stuart Machin stated that its market positioning and business strategy will help mitigate any slowdown. He believes that the company has a strong brand image to help it maintain its market share. He also expects strong tailwinds from travel, leisure, and weddings to keep its sales numbers strong.

Marks and Spencer shares have a price-to-earnings (P/E) ratio of 9. While it’s not seen as a traditional growth stock, it does have an average price target of £1.93. This gives it the potential to rebound by 43% over a one-year period. Therefore, I’ll be capitalising on its low share price and will buy some stock for my portfolio in July.

The post Should I buy Marks and Spencer shares for its growth in July? appeared first on The Motley Fool UK.

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John Choong has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS, Ocado Group, and boohoo 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.

Pinterest is Ready

Those following Pinterest for a while now would know that the company is integrating its social media and e-commerce offerings together, as it sees huge potential in that space. This is what led to its partnership with Shopify in 2020.

Since then, it has been churning out new features every quarter. One is AR Try On, which allows users to virtually place items from US retailers, using their phone’s camera. Additionally, it launched Idea Ads, which stimulates paid partnerships between creators and businesses from creator-produced content.

But more recently, it recently acquired THE YES to further develop Your Shop. The acquisition aligns with much of what Pinterest is trying to do, as Your Shop allows users to see customised shopping surfaces with brands and products, based on their activity and preferences on the platform.

Skills to pay the Bill

With those developments in mind, I can see why the board decided to hire Bill Ready. For all that Ben Silbermann has done for the company, his lack of expertise in the e-commerce space was prevalent. Therefore, hiring an online commerce expert is an excellent choice, as the new Pinterest CEO has worked at a number of large companies.

Ready was poached from Alphabet‘s Google, where he was the President of Commerce, Payments & Next Billion Users. He oversaw Google’s vision, strategy, and successful delivery of its commerce products, such as Google Wallet. Furthermore, he’s held several leadership roles at PayPal, where he was the Executive Vice President and COO, while also being the CEO of its subsidiaries, Braintree and Venmo.

With such an impressive record in online commerce, I have full confidence that Ready is the right man for the job. I believe that he’s going to be the right leader to make radical progress in the e-commerce space. As the platform continues to rollout its popular seamless checkout feature, Ready could very well help to scale it internationally, where Pinterest has a lot of untapped potential.

Sale of the year?

So, with the Pinterest stock down 45% this year, could this be the sale of the year? For one, the NYSE firm has one of the best balance sheets I’ve encountered. It has zero debt and a fat cash balance of $2.7bn. Moreover, it boasts healthy earnings margins of 12.5%. These indicators point towards a strong company with good financials, earnings power, and bright future prospects — everything that satisfies Warren Buffett‘s investment criteria. This is why I’m a big fan of the stock.

Despite losing almost half of its value already this year, I still expect the stock to continue declining. This is because growing interest rates are spurring fears of a potential recession. Nonetheless, I’m still bullish about the company’s prospects. As such, I’ll definitely be using the current bear market as a buying opportunity for me to purchase Pinterest shares at a discount.

The post Should I buy Pinterest stock with its new CEO? appeared first on The Motley Fool UK.

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John Choong owns shares of Pinterest, Alphabet, and PayPal at the time of writing. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool UK has recommended Alphabet (A shares), Alphabet (C shares), PayPal Holdings, Pinterest, and Shopify. 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.

The Rolls-Royce (LSE: RR) share price is down 35% this year, having slid below the £1 mark since early April. As the travel industry rebounds, management has guided for the firm’s civil aerospace division to breakeven this year. With that in mind, Rolls-Royce shares could be a bargain at this price. However, there are also a couple of warning signs to look out for.

Why is Rolls-Royce flying so low?

Rising interest rates, rocketing jet fuel prices, and sky-high inflation — need I say more? Making matters worse are the recent airport disruptions. Pent up demand for air travel and a lack of workers has resulted in one of Britain’s main airport, Gatwick, placing flight caps. Additionally, staff at Heathrow Airport will be striking next month, during the industry’s busiest week. If we are to connect the dots, flight cancellations lead to fewer flying hours, meaning less revenue for Rolls-Royce.

The engine manufacturer also faces its own set of worker issues. The company offered a £2,000 bonus to workers last week to mitigate the cost-of-living crisis. However, unions rejected the offer and stated that it, “Falls far short of the real cost of living challenges”. A lack of resolution could lead to a walkout by Rolls-Royce employees, thus hurting its top line even further. But forking out bigger paycheques could impact its bottom line too. For that reason, the board is stuck between a rock and a hard place.

Going nuclear

That being said, Rolls-Royce still has a ginormous backlog of orders. The firm reported a total deal value of £50.6bn in its FY21 results. It’s also managed to ink several large deals since, such as being the main engine manufacturer for the new Airbus A350-F and Qantas‘ Project Sunrise.

Nonetheless, Rolls-Royce is much more than just its civil aerospace division. In fact, its other segments (Defence, Power Systems, New Markets) could very well act as a hedge against a potential slow down in travel. This is largely due to the effects of the Ukraine war.

Aside from the potential increase in revenue from government defence spending, European countries are also desperately clamouring for energy independence. As such, the UK government has allocated £210m worth of funding to Rolls-Royce to further develop its nuclear, small modular reactors (SMR). If successful, this could end up positioning Rolls-Royce as a market leader in nuclear energy in the UK.

Rolls-Royce SMR is able to produce a repeatable factory-built power station, that relies on tried and tested nuclear technology, it can be constructed and made operational far more quickly than conventional bespoke nuclear design and build technology. The Rolls-Royce SMR approach lowers cost, reduces uncertainty and risk for developers and crucially, allows countries around the world to address their urgent need for low carbon energy.

Source: Rolls-Royce SMR

Civil agreement

Despite the exciting ventures however, its other segments rely on the success of its Civil Aerospace division, which generates the bulk of the company’s revenue. Without positive free cash flow (FCF), Rolls-Royce cannot further develop its other divisions and ventures.

Having taken on large piles of debt during the pandemic, the company is still very much recovering. With negative shareholders equity and a slim profit margin for the time being, most of its FCF will be spent on repaying its debt.

Therefore, even though the Rolls-Royce share price is trading at a low level, I’ll only be keeping it on my watchlist for now. Until its financials improve, I won’t be investing in its shares. Instead, I’ll be investing my money in other growth stocks with much better balance sheets.

The post The Rolls-Royce share price could be stuck below £1 for a while. Should I buy? appeared first on The Motley Fool UK.

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John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has no position in any of the shares mentioned. 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.

International Consolidated Airlines Group (LSE: IAG) shares are currently trading at £1.15, and are down 25% this year. Given the current economic landscape, its stock could be in further trouble, and here’s why.

Excess baggage

From Covid, to inflation, and now airport disruptions, the travel industry can’t seem to catch a break, and this week has been one of the more disruptive ones. Staff shortages, technical difficulties, and rail strikes have served up a perfect dish of chaos for IAG.

On Monday, Heathrow Airport suffered a widespread problem with its baggage system. As a result, Heathrow requested airlines to cancel 10% of their flights from Terminals 2 and 3. Although IAG’s main hub is located at Terminal 5, this still affected the limited number of IAG services at T2 and T3.

To make matters worse, Gatwick Airport capped its daily operations to 825 flights a day in July, and 850 flights a day in August, due to staff shortages. This has led to delays and flight cancellations, with easyJet suffering the brunt of it. Nevertheless, I doubt IAG is spared from this as I’m expecting a number of its services to be impacted as well.

Three strikes and you’re out

Three weeks ago, British Airways check-in staff threatened to strike in July. This is because their pay has yet to return to pre-pandemic levels after salary cuts made during the pandemic. With the deadline fast approaching on 27 June, IAG is stuck between a rock and a hard place.

For one, the board could reinstate workers’ pay, but doing so would impact its already fine margins. To mitigate this, British Airways would have to increase its ticket prices, which might dampen demand and extend its route back to profitability.

On the other hand, not doing anything could be equally devastating. A lack of check-in staff might lead to further delays and cancellations, which wouldn’t be good for IAG shares. Seeing that British Airways is the group’s biggest revenue driver, a strike could impact IAG’s top line quite substantially.

Delayed departure

In its last trading update, IAG mentioned that it expects to achieve operating profitability by Q2. However, this seems to be increasingly unlikely. Apart from potentially having to fork out higher wages or lose millions in revenue, the FTSE 100 firm still has to deal with high oil prices.

Since its Q1 update, jet fuel prices have hit fresh new highs of $175 per barrel, which isn’t going to do its bottom line any favours. Additionally, the Consumer Price Index in May continued to hit 40-year highs at 9.1%. With fears of an impending recession, this is most likely going to dissipate the travel tailwind and send IAG shares even lower.

More importantly, IAG’s balance sheet is in a terrible state. Its debt-to-equity ratio sits at a staggering 2,318%, while its short-term assets can’t cover its short-term liabilities. Not to mention, its last reported free cash flow sits at -€885m. This rings alarm bells of a company that’s in big trouble. Therefore, I won’t be investing in IAG shares. Instead, I’ll be parking my money in other growth stocks that have better financials.

The post Could IAG shares be in further trouble? appeared first on The Motley Fool UK.

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John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has no position in any of the shares mentioned. 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.

A little goes a long way

In the sea of electric vehicle companies, Arrival is still a small fish. But what makes the British unicorn so unique is its microfactory concept. Each factory can produce 10,000 vans. It is also estimated to have a low capital expenditure rate of £50m, while turning over £100m per year. This would cost much less than a traditional factory. Additionally, a microfactory only takes up 20,000 square metres. Pair this with its modular production method, and Arrival can quickly adapt to demand in an area, rent a small warehouse, and start production.

Nonetheless, this is still a concept and is yet to be proven. As such, I remain cautious. However, successful execution could very well alter the traditional assembly line that Henry Ford once pioneered, and change how vehicles are produced.

Much needed Arrival

Having achieved bus certification last month, the Nasdaq-listed firm could begin trials with one of its biggest customers, FirstGroup. Arrival also recently partnered with Enel X, a market leader in advanced energy solutions. The partnership will test Enel X’s advanced charging services on Arrival’s buses. A successful trial could results in additional orders to Arrival’s 143,000 letters of intent (LOI).

The success of these tests will be a key building block for Enel to include the Arrival Bus within its portfolio of global electrification solutions.

Source: Arrival Investor Relations

More importantly though, was the achievement of van certification this week. The van makes up 96% of the company’s current LOIs, so this was extremely good news. Consequently, Arrival shares exploded 15% on the news. This also puts the firm on track to start its van production in Q3. With 400 to 600 vans expected to be produced by the end of this year, this will bring in the company’s first batch of revenue.

Foggy road ahead

That being said, Arrival has an uncertain path ahead. While the Bicester-based company expects to finish the year with $150m to $250m of cash, it still won’t be sufficient to run its operations for 2023 and onwards. This worries me as an investor.

A stock offering is unlikely given its already low share price. Not to mention, dilution would potentially lead to its share price falling below $1, and getting delisted from the Nasdaq. Therefore, Arrival may have to take on debt, which will be costly in a high interest rate environment. This would also make its road towards profitability a much longer one, as future earnings would go towards repaying its debt.

Nevertheless, the average target price for the stock is currently $5.98, which presents a 350% upside! Although I doubt the share price will climb to such levels, I think there’s a decent chance the stock can grow by 100% if it sticks to its production guidance. This is why I’m currently holding a small position in Arrival shares.

The post Here’s how Arrival shares could double my money! appeared first on The Motley Fool UK.

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