Must read: Rolls-Royce, WPP, BAE Systems, Heathrow, Tesco

The FTSE 100 bucks broader strength across Europe, says our head of investment Victoria Scholar.

GLOBAL MARKETS

After a difficult week so far for markets, European bourses have opened mostly higher except for the FTSE 100, which remains under pressure inching closer to support at 7,900, dragged down by Mondi (LSE:MNDI) and BAE Systems (LSE:BA.), which are languishing at the bottom of the basket after earnings.

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US futures are pointing higher after a mixed close on Wall Street with the Nasdaq eking out a modest gain. The latest FOMC minutes suggest the Fed has further rate hikes to go with inflation remaining ‘well above’ target and a tight labour market stateside. In an interview with CNBC, St Louis Fed president James Bullard said the terminal rate should land at around 5.375%.

ROLLS-ROYCE

Rolls-Royce Holdings (LSE:RR.) reported underlying operating profit up 57% in 2022 to £652 million. Net debt fell to £3.3 billion versus £5.2 billion at the end of 2021 thanks to disposals and improved cash flow, which rose by £2 billion year-on-year thanks to a recovery in flying post pandemic. It is aiming for large engine flying hours at 80-90% of 2019 pre-Covid levels.

New CEO, former BP executive Tufan Erginbilgic who replaced Warren East at the start of January, said the engine maker has been underperforming financially for many years after telling staff last month Rolls-Royce is a ’burning platform’. Erbinbilgic is expected to drive major change as part of the company’s transformation programme including a strategic review  to steer the business in a more positive direction. However, he said it is too premature to talk about job cuts, although his predecessor shed 9,000 jobs to save £1.3 billion in costs in light of Covid.

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Investors have fallen out of favour with Rolls-Royce in recent years given its bumpy ride with shares shedding more than 60% over the past five years. However that could be set to change with the CEO shake-up potentially reinvigorating the bull case if he can spearhead a much-needed drastic overhaul. Reflecting this optimism, shares in Rolls-Royce are enjoying double-digit percentage gains today, soaring to the top of the FTSE 100, landing the stock with a year-to-date gain of around 28%.

WPP

WPP (LSE:WPP) has jumped towards the top of the FTSE 100 after upgrading its 2023 organic growth guidance to between 3 and 5%. Like-for-like revenue less pass through costs rose by 6.4% in the fourth quarter, beating consensus estimates for 5.3. Full-year pre-tax profit hit £1.16 billion rising from £950.8 million in 2021, while 2022 revenue rose to £14.43 billion versus £12.8 billion year-on-year. WPP has been able to return over £3.4 billion to shareholders through buybacks and dividends over the past three years thanks to its transformation.

While advertising spending tends to be a cyclical outlay that ebbs and flows with the economic cycle, encouragingly customers have continued to invest in marketing in the final quarter of the year at WPP despite the macroeconomic headwinds. 2022 helped to drive new business including assignments with Audible, SC Johnson and Verizon. Since the trough in October, the stock has been enjoying an uptrend, rallying by more than 40% off the lows with an extension of recent gains in today’s session.

BAE SYSTEMS

BAE Systems (LSE:BA.) reported underlying earnings per share up 9.5% to 55.5 pence for 2022, ahead of analysts’ expectations for 53.9 pence and a record order intake of £37.1 billion. The defence business raised its annual dividend by 7.6% and saw sales increase by 4.4% to £23.3 billion. BAE Systems issued upbeat 2023 guidance for sales up 3% to 5% and full-year earnings per share outlook up 5% to 7%.

BAE Systems was one of the best performers on the FTSE 100 in 2022 in what the company describes as ‘an elevated threat environment’. 2022 saw a sharp increase in demand for defence technologies to support national security.

Britain’s biggest defence company has seen growth on the top and bottom line as well as a fall in net debt and increased free cash flow. CEO Charles Woodburn also said the company has been successfully navigating the macroeconomic headwinds from supply chain issues and inflationary pressures.

Shares in BAE Systems are up around 45% over a one-year period, however investors are struggling to get excited by the stock today with shares under pressure.

HEATHROW

Heathrow Airport reported an adjusted loss before tax of £684 million improving versus a loss of £1.27 billion in 2021 during the pandemic. Revenue hit £2.91 billion more than doubling versus £1.21 in 2021, while passenger numbers trebled to 62 million after borders reopened in March. The London airport kept its 2023 outlook unchanged versus its previous estimates from December.

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Last year’s removal of Covid restrictions helped spur a recovery for Heathrow after the extremely difficult pandemic era when most flights were ground to a halt. However 2022 posed challenges of its own with labour shortages prompting the implementation of limits on passenger capacity between July and October. Strikes, baggage handling problems and cancellations, China’s lockdowns as well as the long-term structural decline in business travel have created headwinds for Heathrow. Plus there is the macroeconomic backdrop to contend with which has resulted in slower growth, a softening consumer and inflated costs. Nonetheless Heathrow said service is getting back to pre-pandemic levels after a successful Christmas and half term, describing 2023 as the ‘year of renewal’.

TESCO

Tesco (LSE:TSCO) has become the latest supermarket to impose buying limits on customers who will be rationed to three items per person on tomatoes, peppers, and cucumbers. It follows similar decisions at Asda, Morrisons and Aldi amid supply problems caused by difficult weather conditions in southern Europe and northern Africa. According to the British Retail Consortium, 95% of tomatoes and 90% of lettuce are imported in the UK. The BRC said the shortages will only last ‘a few weeks’ before UK supermarkets can find alternative supplies. Former Sainsbury (J) (LSE:SBRY) CEO Justin King told BBC’s Today Programme the sector has been ‘significantly disrupted by Brexit’ and criticised the government for failing to support the food industry.

Images on social media have been circulating showing empty supermarket shelves across the UK. As well as cold spells in Europe and floods in north Africa, problems with the global supply chain, Brexit and soaring energy bills have been pointed to as potential factors causing the shortages. While certain supermarkets are yet to impose limits, it looks likely that they could follow suit, facing similar struggles to obtain certain fresh produce.

While the headline rate of inflation in the UK eased slightly in January, food inflation remains sharply above the average with the latest supply disruptions potentially adding to those upward price pressures, which could affect those at the lower end of the income spectrum disproportionately.