Week Ahead: Persimmon and the housebuilder recovery | The best company in the world | German giants

Welcome to the Week Ahead, your weekly destination for conversation about large cap and international news. We’ve seen interest in US stocks really tick up in 2024 so we’re looking to expand our coverage of these stocks (especially in the US) in the coming weeks. Let us know which sectors or companies you’d like to see increased coverage of.

It’s hardly surprising that more of our community is starting to look overseas for opportunities. Because the UK remains lacklustre. Last week’s big economic event in the UK (the Chancellor’s budget) had very little impact on the domestic markets as a whole. The FTSE and AIM All Shares were flat week on week, although the 250 (which largely comprises companies with a high exposure to the British economy) crept up slightly.

It will be interesting to see how the same market performs this week when we’ll get a few more hints about how the economy is holding up. On Tuesday the claimant count rate will show how the labour market is holding up, while financial results from housebuilder Persimmon, estate agency Savills and infrastructure group Balfour Beatty (all due this week) could add some colour.

Overall though, the sense is that there is not an awful lot to be excited about in the UK right now. This week we’ll have numbers from Domino’s Pizza which, despite being one of the best performing shares in the UK over the last decade, now fails to garner the same enthusiasm as it once did.

Things are slightly more exciting across the pond where Adobe will be announcing first quarter figures on Thursday. According to our proprietary stock analysis algorithms Adobe currently has a Quality Rank of 100 - that is surely quite appealing to many prospective investors, despite the relatively lacklustre share price momentum of late and an exorbitant valuation (Megan has analysed the stock’s prospects below).

Company announcements to look out for this week

Persimmon: Can the housebuilder recovery continue?

Housebuilder shares have surged in the last few months as inflation has started to temper in the UK, sparking hope that interest rates will be cut substantially in 2024. Persimmon, which will report its full-year results on Tuesday 12th March, has seen its share price rise by almost 40% since late October 2023.

The numbers that are due out this week will likely tell a different story - a backward looking one which reflects the incredibly challenging market conditions housebuilders have faced in the last year. Current expectations ahead of the FY results project a 31.8% sales decline for Persimmon in 2023 to £2.6bn, amid planning hurdles and dwindling demand due to interest rates. Earnings per share are forecasted at 82.18p, a 66.5% year-on-year decrease.

The most recent set of numbers we’ve seen from the company (in January) showed that completions have recently started to exceed expectations and, in the last few months, the average selling price of houses has increased 5%. This reflects a more positive sentiment being enjoyed among estate agents (something we wrote about in a recent newsletter, which you can read here).

It’s worth noting that the UK competition watchdog is investigating housebuilders for possible information sharing, impacting home prices. This stems from a year-long market study citing planning complexities and resource insufficiencies, potentially warranting future attention for any housebuilders being considered as potential investments.

But all eyes on Tuesday will really be on the outlook and whether the company expects to keep up the momentum reported in the January trading update when the Q4 sales rate had materially improved compared to the remainder of the year. 

Look out for: Forward guidance for 2024 and any update on its capital returns policy as Persimmon has paid out higher dividends in the past and currently sits on plenty of cash.

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Can IG Group complete the trio of positive updates?

Like its peers, Plus500 and CMC Markets, IG Group numbers can help provide a clue to market sentiment. In the interim results (released at the end of January) revenues and profits had both fallen, reflecting the difficult market conditions, falling demand for stock market investment and general caution which impacted many of the companies in the UK asset management space in 2023.

But since the end of January, CMC Markets and Plus500 have set a high bar with robust trading updates, leaving investors eager to see if IG Group, as the largest of the trio, can similarly capitalise on improving market dynamics.

CMC Markets' higher net operating income, largely attributed to its strategic efficiency drive and structural savings, suggests potential synergies for IG Group, which announced workforce reductions last October as part of its own cost-cutting initiatives.

Meanwhile, Plus500, which has a bit of a habit of consistently exceeding earnings expectations, announced significantly better-than-anticipated FY 2023 results. Moreover, the company's initiation of a $100 million buyback program signals confidence in its financial position and market outlook. There could be some promising read across for IG.

The performance of IG Group's diversification strategy, particularly through its options trading arm, Tastytrade, will be a focal point. The sustained growth of Tastytrade in the face of broader revenue declines underscores the importance of the company’s diversification strategy, allowing it to mitigate risks and unlock new sources of revenue. As the US markets reach dizzy heights, Tastytrade will be well-positioned to reap the rewards.

This will also be the first trading update since the appointment of Breon Corcoran as CEO, which signals a new chapter for IG Group. Investors will seek fresh perspectives and insights into the strategic initiatives aimed at propelling future growth and value creation for the company.

Delving into financial metrics, IG Group remains attractively priced, boasting a forward PE ratio of 7.6x and a dividend yield of 6.7%. Notably, its impressive EV/EBITDA ratio, bolstered by a substantial cash pile, emphasises the company's financial robustness, despite its current momentum challenges.

It’s worth remembering that leveraged financial instrument providers like IG Group often serve as effective hedges against market volatility. As volatility increases, traders tend to gravitate towards these instruments, seeking opportunities to profit from price fluctuations while managing risk. Consequently, IG Group's business model may offer resilience and stability if markets take a more volatile turn.

Look out for: Further progress of Tastytrade division, as it benefits from heightened levels of options and futures trading in US markets. Confirmation of operational progress on cutting costs and any strategic update of the company’s vision under the new CEO.

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Adobe: The best company in the world?

It’s perhaps a telling sign of my psychological bias that I have gone into this analysis looking to justify Adobe’s current share price ($552), which leaves it with a forecast price to earnings ratio of just under 30x.

To be clear, Adobe (a stock I own) has never been a value play and that certainly isn’t the case in 2024. But that doesn’t mean it might not be an investment opportunity. First quarter results, which are due to be announced on Thursday will be the first since management announced it was walking away from its proposed $20bn acquisition of design rival Figma after European regulators deemed the deal uncompetitive.

The thing is, Adobe is already in a position which is likely to irk competition regulators. Its flagship document processor (the PDF) was used 400bn times in the last year, while its ability to innovate in its creative solutions business makes it difficult for peers (like Figma) to take market share.

Adobe was founded in 1982 by computer scientists John Warnock and Charles Gesche. The company’s first product was the PostScript document reader - a programming language which allowed printers to read computer text and images, thus allowing high quality printing. After PostScript came to Illustrator and Photoshop, which allowed it to gain access to the consumer market. And in 1993 the company launched the Portable Document Format (PDF) which is ubiquitous around the world.

Today Adobe is split into three operating divisions revolving around their creative (63% of total revenue), document (15%) and corporate analysis (22%) solutions. All three divisions offer services which are hosted on the company’s cloud operating system and have started integrating its Firefly artificial intelligence software. And all three reported double digit revenue growth in the final quarter of the 2023 financial year thanks to product innovation, which led the way to more customers and a higher spend per customer.

It’s this innovation which lies at the heart of the Adobe investment case. The company is incredibly asset light which means it is phenomenally cash generative (operating cash inflows were $7.3bn in FY2023 from $6.7bn of operating profits) and gives it plenty of scope for reinvestment in product development. In 2023, the company spent $3.5bn on research and development. And the expensing of that investment is a good sign - almost all of the development projects offer immediate payback, so capitalised costs are very low, which fuels the virtuous circle of cash generation.

What’s more, the subscription business model and best-in-class service makes current custom very easy to maintain. Sales costs are so low that the company regularly reports gross margins at almost 100%, meaning ongoing expenditure can all be invested into winning new business. This has fuelled a compound annual growth in revenues of 17% over the last five years. In the three months to September 2023, the company booked quarterly revenue in excess of $5bn for the first time. It will be interesting to see whether it has managed to maintain that momentum in the first half of the new financial year.

The combination of extraordinary profitability and reliable growth makes Adobe hard to value based on ordinary metrics. Strip out the $7.9bn of cash on the balance sheet and the PE ratio is a more reasonable 25 times forecast earnings. And take into account the growth in earnings (which are also bolstered by regular share buybacks) and you’re left with a PEG ratio of 1.2x - quite tempting?

Lookout for: Plans to foster continued impressive growth now that the Figma merger has been abandoned. 

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Germany: Economics figures and two potential value opportunities

Tuesday also heralds the release of German CPI figures, poised to unveil a year-on-year projection of 2.5%. Against the backdrop of Germany's soaring DAX index, which has consistently scaled new heights, this CPI reading will need to tread below the anticipated 2.5% threshold to propel it to new heights.

We’ll also get numbers this week from two of the companies which have not yet been swept up by the DAX momentum and could yet provide interesting value opportunities: Volkswagen and Adidas.

Volkswagen’s shares trade on just 4.3 times forecast earnings. That’s despite the fact that in the last few years, the company seems to have shaken the shackles imposed by Covid lockdowns and reported some decent growth figures. The key to the Volkswagen growth case lies in its electric vehicle rollout. The ID range has been popular in Europe, but the company is now facing rising competition from established peers like Toyota and EV upstarts in the Chinese market.

It is hard to tell how significant these Chinese competitors could be - building a car making factory is not easy, but reports from China suggest that some of these new companies could be able to start delivering competitive volumes.

The trouble for EV makers is that the rollout of these new cars is slightly dependent on the infrastructure in target markets. Some countries are far better prepared for electric vehicles than others and it’s here that will see the biggest competition for custom.

There are challenges for Volkswagen which make the investment case a little murky, but it’s worth remembering that this is a company which delivered almost 5m vehicles worldwide last year, but currently has a market capitalisation which is an eighth of that of Tesla (which sold less than 2m cars in the same period).

Wednesday will also see 2023 full year results for Adidas, whose shares have been enjoying better momentum than in recent years. But the numbers are likely to show the extent to which the duopoly previously shared with Nike has been upheld. Competition is rising in the athleisure market and both new and revitalised brands have started to encroach on Adidas’ market share.

Lookout for: A buying opportunity at Volkswagen and a reason to sell Adidas