Daily market update: Alphabet, Tesla, Reckitt, Lloyds, ITV

“European shares marched higher on Thursday as the positive sentiment generated by the trade deal agreed between the US and Japan continued to permeate the markets,” says AJ Bell Investment Director Russ Mould.

“The continued momentum came despite a mixed start to the big tech earnings season across the Atlantic as Alphabet and Tesla posted their numbers after hours, with some well-received corporate results helping support UK stocks as the FTSE 100 sailed through the 9,100 barrier.

“A brief but fairly robust update from BT and the announcement of a new finance chief in the form of Patricia Cobian, an experienced name in the sector, received a positive reception from investors.

“Vodafone also got some traction as investors reacted with some relief to unchanged full-year guidance with all areas of the business showing growth except Germany. While this is Vodafone’s core market and its continuing struggles are undoubtedly an issue, the company is at least beginning to stem its losses here.

“Howden Joinery has once again proved to be a strong player in a weak market. Consumers might have been scaling back from big-ticket purchases in general, yet Howden is still selling plenty of kitchens. Sales and profits ae growing, and it is taking market share.”

Reckitt

“Kris Licht has donned his marigolds and got out the mop and bucket in an attempt to clean up the mess at consumer goods giant Reckitt. First-half results have got the market believing in his recovery plan.

“Having recently announced the sale of its Essential Home portfolio, the company has now issued an eye-catching upgrade to revenue guidance for its core brands.

“The merits of focusing on its ‘Powerbrands’ is evident in the numbers with them delivering meaningful growth at a strong margin while the Essential Home component is finding life harder going.

“Reckitt lauds the benefits of its more focused approach which means it is pitching the brands that really matter more successfully and thereby achieving market share gains.

“The big question for management is what happens with the Mead Johnson infant nutrition business, with that question only likely to increase in volume given the weak performance, notwithstanding a slight improvement in the outlook. The litigation issues which continue to loom are not helpful in terms of achieving an exit.

“Reckitt’s significantly better performance in emerging markets is telling. In the developed world the company faces increasing pressure from unbranded alternatives. However, in developing countries these alternatives do not exist in any meaningful sense and therefore the company’s trusted brands are in demand with those consumers who can afford them.”

Lloyds

“Despite a shift in the interest rate environment, Lloyds served up better-than-anticipated profit in the second quarter. This suggests the strategy pursued under CEO Charlie Nunn of generating a greater proportion of revenue which isn’t as sensitive to rates may be gaining some traction.

“A big driver of profit was an increase in fees from managing customers’ insurance, investments and pensions. Another thing helping the quarterly performance was the release of a tariff-related impairment taken earlier in the year back into the income statement.

“Tellingly, despite the better-than-anticipated profit, the company has left full-year guidance unchanged. On an underlying basis this was a ‘steady as she goes’ announcement not a ‘shoot the lights out’ one.

“While there were no further provisions relating to motor finance mis-selling, a Supreme Court ruling, expected in the next few weeks, continues to loom large for the company. Lloyds needs a favourable outcome to stand a chance of achieving its returns target.

“Costs were higher, despite ongoing efforts to increase efficiency through digitisation, although this partly reflected the impact of redundancy costs as the bank reduced its workforce.”

Alphabet

“There are four things that matter to investors every time Alphabet issues its quarterly results. These are the rate of growth in cloud computing, how search is performing in the wake of AI-driven competition, advertising income, and capital expenditure.

“It has passed with flying colours, despite an initial wobble in its shares immediately after the figures came out. That wobble was driven by guidance for higher spending, something that investors typically dislike as they prefer money coming in rather than going out. However, the shares soon settled higher in pre-market trading as the market took time to digest the overall numbers and decided that Alphabet was still looking strong in a more challenging and competitive market.

“Alphabet is spending big bucks to stay ahead of the game. It’s in a fortunate position to be able to throw billions of dollars to enhance its technological capabilities given the amount of cash the business generates.

“Its second quarter free cash flow fell sharply compared to the previous three quarters at $5.3 billion, which is cash generated by operations minus capital expenditure. On one hand, it is spending big and still has bucket loads of cash left over, which is a fortunate situation to be in. On the other hand, a big decline in free cash flow means investors will be watching this metric closely in three months’ time, hoping the Q2 decline was a one-off and that there is a big improvement.

“What matters is Alphabet spending its money wisely. It’s all well and good throwing money around on AI and related technology, but this investment needs to generate a positive return. That’s why there is so much market sensitivity around capex plans from any of the big tech names. So far, Alphabet appears to be spending it in the right places, as it is coping well with more competition on the search side and its own AI services are growing fast.”

ITV

“ITV has all the hallmarks of someone who has been to the gym and enrolled on a nutrition programme, becoming stronger and leaner.

“It was always going to be tough job to beat last year’s performance given it had a major advertising boost from the Men’s Euros football. However, ITV has done better than expected, helped by going from strength to strength with digital advertising. The ITVX streaming platform has been a great success and the company is finding new ways to help advertisers reach a more targeted audience.

“It is keeping a lid on content spend, which has gone down well with the market. More thought is going into what people want to watch rather than splashing the cash on every new idea. ITV is also finding new ways to save money in the business, albeit there is an upfront cost to stomach before the benefits come through.

“For all the criticisms around ITV becoming less relevant amid a declining linear TV market and growing competition from modern streaming platforms like Netflix, the UK business is standing firm and showing it still has a lot to offer.”

Tesla

“Tesla’s headwinds are getting worse and investors are becoming less enamoured with the business.

“Competition is fierce, tariffs are biting, the end of tax credits for electric vehicle buyers in the US could hurt, Elon Musk’s political escapades have been a turn-off for many people, and product innovation has failed to make waves.

“A push into more affordable vehicles implies a drop in profit margins, while the hope of being big in self-driving cars remains a fantasy rather than reality. The Cybertruck product line hasn’t filled the treasure chest for the company, and for many the Tesla brand has become toxic because of Musk’s outspoken views.

“The second quarter results are as ugly as the Cybertruck design with revenue, profit, margins and free cash flow all in decline. It’s difficult to see how Tesla digs itself out of the hole it is in any time soon.”