The Week Ahead (10-14 Nov): Budget uncertainty, VOD, BME, QQ

The Bank of England left its main interest rate unchanged at 4% this week, but it was a finely-balanced decision – the Bank’s Monetary Policy Committee voted 5-4 in favour of a rate freeze, with four members supporting a cut to 3.75%.

Arguably, this makes a rate cut in December more likely, assuming the Bank’s view that inflation has peaked proves correct.

Interestingly, two members of the MPC already believe that monetary policy [interest rates] are “significantly over-restrictive”. In their view, this has the potential to “unduly damage [economic] activity and possibly lead to an undershoot in inflation in the medium term”.

A post-2003 chart of interest rates suggests that the current rate is in a relatively normal range, with plenty of room to move lower if needed:

Source: Bank of England

However, this chart from the Office for National Statistics (ONS) suggests that weakening inflation isn’t yet making its way through to the official stats, except in relation to home ownership:

We’ll have to see if inflation data for October and November support the view of some MPC members that inflation is weakening.

My impression is that managing interest rates and inflation is as much art as science, but I am inclined to think that a rate cut is increasingly likely once the uncertainty attached to November’s Budget has passed.

Looking ahead, I suspect that UK economic data published over the next couple of weeks – including GDP – is likely to continue being overshadowed by speculation and leaks about the content of the Budget.

Debate has continued this week over whether the Government will break its election pledge not to raise Income Tax, or find other ways to control inflation while supporting the economy. Measures rumoured in the press this week have included per-mile charges for electric cars and the removal of VAT from utility bills.

Fortunately for investors, the big UK banks are expected to avoid any additional profit levies. That should help to support the generous dividends on offer from several of these lenders:

Not all companies are expecting to escape scot-free from the Budget, while some are already suffering due to consumer uncertainty. In the DSMR this week, we’ve seen companies including J D Wetherspoon (LON:JDW), J Sainsbury (LON:SBRY) and housebuilder Barratt Redrow (LON:BTRW) warn that Budget changes – and consumer caution in the run-up – could impact this year’s results.

ITV (LON:ITV) went further, guiding investors to expect a 9% drop in fourth-quarter advertising spend due to “consumer and corporate” uncertainty in the run-up to the Budget.

UK company news

Vodafone (LON:VOD)

For many years, FTSE 100 telecoms giant Vodafone was rightly seen as a destroyer of shareholder value, thanks to its sluggish growth and dire profitability metrics. But things seem to be turning around under CEO Margherita Della Valle.

In May I highlighted the unlikely Super Stock status of both BT and Vodafone. I’m happy to see that Vodafone retains that styling today and has performed well so far this year:

Ms Della Valle’s achievements have included the sale of the group’s Italy and Spain businesses, but perhaps her biggest success has been the merger of the Vodafone and Three networks in the UK.

The deal was completed in June and has reduced the number of physical mobile networks in the UK from four to three. Consolidating the market in this way had previously been seen as unpalatable by UK regulators on competition grounds. However, Vodafone appears to have persuaded the CMA that the low returns on capital being generated across the sector could imperil further investment unless something changed.

There’s not yet much concrete evidence that Vodafone’s profitability is improving. Last year’s return on capital employed of 4.4% is still far too low to cover the group’s cost of capital. But I’m hopeful that the impact of the changes made over the last few years will soon start to trickle through.

I’m also keen to see if Vodafone can engineer a return to growth in its largest market, Germany, where the company is a big player in broadband as well as mobile. Achieving a turnaround in Europe’s largest economy is Ms Della Valle’s stated priority this year.

Vodafone is currently the second-highest ranked stock in the FTSE 100 – will this position be maintained following Tuesday’s results?

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B&M European Value Retail SA (LON:BME)

Value retailer B&M had already suffered a string of profit downgrades this year. But things took a turn for the worse in October when new CEO Tjeerd Jegen revealed a £7m accounting error and slashed profit guidance again.

Weak trading is never good news, but accounting problems are a more serious concern for me, as they hint at possible management failings.

When I reviewed this update in the DSMR on 20 October, I took the precaution of adopting a RED view on the stock. One reason for this was that I couldn’t quite make the numbers add up in the company’s revised guidance.

This particular accounting error is blamed on a system change, but it was still seen as serious enough to warrant the departure of the CFO and an external investigation.

It’s also worth remembering this profit warning came just two weeks after a previous profit warning, when Mr Jegen highlighted various operational failings he’d identified in his initial review of the business. Amazingly, these issues included an emphasis on store presentation which “prioritised the look of a full shelf over actual stock availability”.

Viewed as a whole, these problems give me the impression that this previously well-run business has gone downhill since former co-owner and CEO Simon Arora stepped down in 2022.

The new CEO is highly experienced in value retail and I remain confident a turnaround should be possible. Quality metrics were previously formidable and remain tempting to me, especially as this business has paid very generous dividends in the past.

However, I expect to see a sharp fall in profitability as the downgraded FY26 results make their way into the stats:

While the 9% yield seems tempting and is covered by forecast earnings, B&M’s rising leverage and falling profits suggest to me that a dividend cut might also be needed to help repair the balance sheet.

The Contrarian styling here could be highlighting a potential buying opportunity. But B&M’s MomentumRank of zero is relatively unusual and suggests to me that the tide has not yet started to turn.

Next week’s interim results will hopefully shed more light on the company’s accounting problems. I’ll certainly be watching with interest in the hope that we’ll be able to moderate our view on this former strong performer.

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Qinetiq (LON:QQ.)

Many defence stocks have been big winners this year, but FTSE 250 group Qinetiq has bucked the trend, suffering problems in the US and multiple earnings downgrades:

As a result, the shares have significantly underperformed the FTSE 350 Aerospace & Defense Index and its FTSE 100 peer, BAE Systems:

This week’s interim results will provide the first update from the firm since July, when management said trading was in line with (revised) expectations.

If this outlook is maintained, I think the stock’s valuation could start to look quite reasonable for a defence business in the current market:

However, the low StockRank and Neutral styling mean that I’m not tempted to try and front run this week's numbers:

In fairness, Qinetiq’s reported losses in FY25 have probably depressed the StockRank. These were due to impairment and restructuring charges that were mostly related to the group’s legacy US operations.

If the H1 26 accounts are cleaner and free of any further large adjustments, then I’d expect the StockRank to improve somewhat once the algorithms have digested the fresh accounts. One to watch on Thursday, perhaps.

Here’s a summary of what’s expected next week - in the meantime, I hope you enjoy the weekend.

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Disclosure: Roland owned shares in ITV at the time of publication.