Daily market update: BP, Debenhams and Watches of Switzerland

The FTSE 100 was steady after a renewed surge in oil prices as Donald Trump reinstated a blockade on Iranian ports.

Investors feel like they’ve hit rewind on a movie they didn’t enjoy first time round. The ability to get shipping through the Strait of Hormuz is once again compromised thanks to the renewed tensions between Tehran and Washington.

For now, investors seem to be retaining a measure of calm and hoping a path towards a resolution in the Middle East can still be found. The longer the current situation persists though, the more likely market sentiment takes a more serious hit.

The UK market fared better than most other parts of Europe thanks to its heavy exposure to the energy sector through BP and Shell.

Stocks with exposure to the travel sector along with retailers and housebuilders were among those to take a step back as investors weighed up the implications of potentially higher inflation and interest rates.

BP

One of the key worry points for investors over BP is its balance sheet. In that context, it’s not a surprise to see significant debt reduction get a warm reception.

It wasn’t all good news. Production is lower thanks to maintenance work and Middle East disruption, and the refining business is still suffering a hangover from a fire at its Whiting refinery in Indiana.

Ongoing volatility in oil prices makes forecasting the immediate outlook for the earnings of BP and its peer group difficult.

However, one thing is clear: the move away from renewables and back towards a focus on the bread-and-butter hydrocarbon operations is set to continue.

BP’s announcement of a $1 billion impairment charge in its gas and low-carbon energy transition businesses and news Shell is selling its Indian renewables business reinforce this trend.

BP is in a state of limbo at executive level after the acrimonious departure of chair Albert Manifold and shareholders will be looking for an update from CEO Meg O’Neill on the search for his successor at the next set of results.

BP can ill-afford any sign of drift as it looks to rebuild its credibility with the market after a difficult and fractious few years for the business.

Boohoo / Debenhams

Boohoo-owner Debenhams has been basking in the sunshine with its turnaround efforts sustaining momentum.

The decent weather should have driven sales as people dress to impress as they get out and about. Positive trading, higher margins, lower returns and more manageable borrowings are the kind of ingredients that make investors happy.

It’s fair to say that Debenhams has reached an inflection point where the business is now in a much better shape. The story switches from turnaround to growth, and the early signs are encouraging.

Watches of Switzerland

Is it takeover time for Watches of Switzerland? Strong gains in profit and cash flow, a leading position in the UK, and clear growth opportunities in the US all point to a business in fine health. It’s no wonder the rumour mill is running red-hot on bid speculation, with private equity and industry players potential buyers.

Having peaked at close to 30 times forward earnings in 2022, Watches of Switzerland’s shares have suffered a major de-rating in recent years, with the stock languishing around 11 times earnings up until a month ago. The valuation has jumped on the recent takeover speculation to 14 times forward earnings.

This looks like a classic example of a UK stock where the market has been spooked by a growth hiccup and has lost interest. If the market won’t fairly value a decent company, history shows it is only a matter of time before a bidder appears.

There is enough in the latest results to keep investors happy with regards to business performance, but the shares have pulled back in a weak market. Management will be wondering what kind of rabbit they must pull out of the hat to please people, and if they can’t, they might conclude it’s not worth being a listed company.