EasyJet waits for demand to pick up, and traditional products drive Imperial Brands’ earnings

“Equities were firm on Tuesday as investors paused for breath after yesterday’s excitement from Moderna’s vaccine news. The FTSE 100 was flat at 6,418 and there was also minimal change in the main indices in France and Germany,” says Russ Mould, Investment Director at AJ Bell.

“Asian markets had their first chance to react to Moderna’s covid-19 breakthrough, but gains were relatively subdued. Hong Kong’s Hang Seng nudged up 0.1% while Japan’s Nikkei 225 traded 0.4% higher.

“On the UK market, investors continued to flock to cyclical stocks which have been in fashion for several weeks amid expectations for them to benefit from economic recovery.

“Travel-related stocks eased back, perhaps as investors took profits following recent gains and following EasyJet’s gloomy outlook where it didn’t feel confident enough giving earnings guidance for 2021. SSP, WH Smith, TUI, Carnival and Trainline were all weak.”

EasyJet

“EasyJet’s full-year results make for ugly reading and reflect a period where the business and its industry have been turned upside down through no fault of their own.

“Shareholders have suffered a sharp decline in the share price this year and the temporarily cessation of the dividend. Customers have had to contend with cancelled flights and the long road to trying to claim refunds.

“It’s been a miserable experience for everyone involved, including those working for EasyJet, which is making more job cuts, freezing pay and switching some staff to seasonal contracts.

“The recent double dose of good news on the vaccine front from Pfizer and Moderna’s trials certainly gives some hope to society that the world can start to return to normal. Airlines like EasyJet need consumers to feel more confident about being about to move around safely, otherwise few people are going to book plane tickets.

“The late summer pick-up in business was encouraging for the sector but optimism quickly waned when new lockdown restrictions began to be rolled out in various parts of the world.

“Being stuck inside during the autumn and winter periods could fuel pent-up demand for wanting to go on holiday. Once lockdown restrictions start to ease again, a more optimistic consumer may well feel the time is right to book a break away.

“EasyJet needs that event to happen sooner rather than later so cash inflows can start to radically improve. Even when demand picks up, EasyJet faces the prospect of intense price competition in the industry as airlines rush to attract business to aid their recovery.

“Investors have been bidding the shares up in recent weeks on hopes that an imminent vaccine will revive society and therefore the airline sector. Unfortunately for EasyJet its financial situation will still remain fragile even once business picks up as any recovery will take a long time to return the sector to pre-covid health.”

Imperial Brands

“Whatever happened to the ‘next generation’? The latest results from Imperial Brands demonstrate that it is sales of traditional cigarettes driving revenue, profit and cash flow.

“The e-cigarettes were supposed to be the company’s route to a sustainable future in a world increasingly turning against tobacco thanks to its negative health impact, particularly in the developed world. However, they have run into regulatory issues of their own.

“Historically Fundsmith fund manager Terry Smith has observed that regulation has been a boon to the tobacco industry – preventing it from splurging cash on items like marketing and packaging and making it virtually impossible for any new competition to emerge.

“However, this is with an established product, while vaping and e-cigarettes are newer, less mature markets and therefore more at risk of having their growth potential spiked by tougher rules.

“Against this backdrop Imperial’s new chief executive Stefan Bomhard has to come up with a strategy that investors can believe in – the first task has been to stem the losses in its next generation products business.

“He will need to come up with a detailed and credible plan for the future at the scheduled investor event in January 2021.

“The dividend has already been rebased this year – making it difficult for Bomhard to go further – though he may wish he had a freer hand given the dividend came at a cost of $1.7 billion in the financial year just gone, funds which could be used to reshape the business.”

These articles are for information purposes only and are not a personal recommendation or advice.