Argos Shines as Sainsbury's Reassures Investors

The Week: Morningstar columnist Rodney Hobson welcomes a positive update from the supermarket giant, as well as the prospects for DS Smith, Lookers and InterContinental Hotels

Rodney Hobson 3 July, 2020 | 9:07AM
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Sainsbury (SBRY) shareholders like me should feel rather more reassured by this week’s update than they were by the previous offering earlier in the lockdown when rising sales were spoiled by a surge in costs as more customers opted for home deliveries.

Grocery sales soared 10.5% in the 16 weeks to June 27 despite more pubs and restaurants offering deliveries and takeaways, while clothing and fuel sales recovered faster than expected. The big, pleasant surprise was the 10.7% sales growth at Argos, boosted by home deliveries and click-and-collect. It was the most promising news from the supermarket chain for several years.

The shares hit a low of 175p in March and the subsequent recovery fizzled out in May, with the next trough at 182p. A second recovery wave could again be petering out. It is important that the shares stay above 200p. Around that level has been both a floor and a ceiling on several occasions during the past few torrid months.

With higher costs still wiping out the sales gains and the future so uncertain I cannot in all honesty recommend the shares as a buy. But I do feel a lot happier about holding on and hoping for better times.

DS Smith Should be Resilient

Packaging group DS Smith (SMDS) is misunderstood by investors who hear the environmentalists baying for blood. Smith has got rid of its plastics division, the bete noir of packaging, and is concentrating on more environmentally friendly fibres.

Results for the year to April 30, covering a fair part of the Covid-19 crisis period, showed revenue down 2% but, crucially, pre-tax profit up 5%. The outlook is admittedly uncertain and the crisis will have a greater impact on the next financial year but Smith should come through better than most.

It is disappointing but understandable that there are no plans yet to restore the dividend. I would be surprised if there is no payout within the next 12 months.

The shares fell 7%, which was extremely unfair. They look cheap compared to the rest of the market.

Can Lookers Get Moving?

While car sales chain Lookers (LOOK) is embroiled in accounting irregularities and worries about how car sales will pick up post Covid-19, one line of the trading statement stood out: “The board believes that 2019 will remain profitable at the underlying profit before tax level.” 

While last year seems a long time ago now, being well before lockdown, this is a welcome relief. It does open up hopes that Lookers will be able to survive and ultimately move on.

Alas, not all issues raised by the Grant Thornton inquiry have resolved, which means the 2019 audit cannot be completed and the shares have been suspended at 21p. They were worth nearly three times as much in January but are up from the low of 11p in mid-March.

It’s anyone’s guess what level they will come back at, but I am confident that they will return quite soon. The shares are strictly for those who relish risk, but if you do then take a look now and decide what you are prepared to pay when trading resumes. The future could be a great deal better than the recent past.

Room With a View

For InterContinental Hotels (IHG), as for probably the majority of companies, the April-June quarter will have been the pits, with hotels closed in various parts of the world for at least some of the period. What is encouraging is that revenue per room, the key measure for hotels, was lowest in April but improved in May and improved further in June.

The shares initially fell 1% then picked up. I wouldn’t chase them higher. While the worst is over it is likely to be some time before hotel groups get anywhere near back to normal. Meanwhile they are carrying a lot of fixed costs.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.