It’s hard to believe that we’re already half-way through the year. In what seems to be an eternal waiting game, the central banks of most key global economies have yet to cut rates from their recent highs.
That said, significant progress has been made in the UK and US on the inflation side of things. There’s no guarantee this will herald the beginning of looser monetary policy.
However, the positive momentum enjoyed by markets early in the year has carried through into the second quarter. Investors have been largely unperturbed by ongoing global conflicts, and the possible political change that elections might bring.
Here’s how things are looking for our five shares to watch at the end of the second quarter.
This article isn’t personal advice. Investments and any income from them can fall as well as rise in value, so you could get back less than you invest. If you’re not sure if an investment is right for you, seek advice. Past performance isn’t a guide to future returns. Yields are variable and not a reliable guide to future income – remember, no shareholder returns are guaranteed.
Investing in individual companies isn’t right for everyone. Our five shares to watch are for people who understand the increased risks of investing in individual shares. If the company fails, you risk losing your whole investment. You should make sure you understand the companies you’re investing in, their specific risks, and make sure any shares you own are held as part of a diversified portfolio.
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Baker Hughes – steady as she goes
Baker Hughes had a good start to the financial year, with double-digit growth in revenue and profits in the first quarter.
Order intake did drop a little in part due to timing issues. But the $33bn order book means Baker Hughes is well placed to ride out peaks and troughs in demand.
Full year guidance is unchanged which suggests growth of about 14% in underlying cash profit (EBITDA).
Order levels need to tick up again to keep things flowing in the right direction, and we think the outlook on this front is positive.
In the Oil Field Services & Equipment (OFSE) division, we’re still seeing weakness in US drilling activity. But relative strength in the oil price so far this year should provide some support elsewhere if it continues.
The recent award for over 150 electric submersible pumps in a multi-year deal with the Azerbaijan State Oil Company will help second quarter order figures – but without financial details we can’t say how much. We’ll get a clearer view of the big picture in the next quarterly statement on 26 July.
There’s also been exciting activity in the other part of the business, Industrial & Energy Technology (IET). It’s been awarded a 10-year services frame agreement with Woodside Energy to support its ambitious liquefied natural gas (LNG) operations in Australia.
As our energy mix changes, the company is also pivoting towards Climate Technology Solutions where it’s enjoying strong order momentum.
It’s a relatively small contributor right now. But continuing product innovation, combined with its existing expertise, should hold Baker Hughes in good stead longer term. But for now, the pressure is on for orders to pick up again in the traditional business, so be prepared for some volatility if there are disappointments on this front.
Coca-Cola – fizzing with growth potential
Coca Cola’s fourth quarter earnings was a tricky one to follow up, but the drinks giant’s April results didn’t disappoint.
First-quarter organic revenue growth of 9% to $11.2bn was ahead of market expectations. This was helped by higher prices offsetting the impacts of intense inflation in some of its end markets. However as inflation starts to cool, volume will become an increasingly important driver of sales growth. That’s proving to be a stickier lever to pull on, so it’s something to keep a close eye on going forward.
Although its products are already sold in over 200 countries and territories, over the last few years Coca-Cola has still managed to grow the number of consumers that enjoy its products at least once a week.
We think there’s still plenty of room for growth too. In Mexico, the number of weekly drinkers increased 12% last year, an impressive accomplishment given it’s already Coke’s second largest market.
Helping to achieve the group’s recently upgraded 8-10% revenue growth guidance will be the continuation of its herculean marketing efforts.
Having already spent $94bn on marketing over the past decade, Coca-Cola shows no signs of slowing down, spending more than double rival PepsiCo last year.
This might seem like a lot, and it is, but this money is increasingly being spent more effectively to drive profit. While it continues to help keep Coca Cola’s sales growing ahead of the market, investors shouldn’t be put off.
Even with this mammoth marketing budget, profitability is expected to remain at the top end of the peer group. This should be helped by Coca-Cola’s continued mission to refranchise bottling operations, so it can focus on the less capital-intensive and higher-margin business of producing concentrate.
Improving free cash flows and steady debt levels support a forward dividend yield of 3.1%. We could also see further share buybacks this year, which should make the group’s 8-9% earnings per share (EPS) growth target more achievable.
Coca-Cola’s well-established track record has set investor expectations relatively high, so there’s little room for disappointment.
CVS Group – investigation driving uncertainty
Veterinary giant CVS Group has had a mixed performance over the past three months. The pullback in the valuation reflects the Competition and Markets Authority’s (CMA) decision to provisionally launch a formal market investigation into the vet sector, after an initial review.
The review raised concerns over a lack of competition and access to information by the public, as well as pricing. We think the market reaction has been overdone, but keep in mind things could get worse before they get better.
Underneath the hood, CVS remains in a strong position. The group’s pressing on with strategic acquisitions to expand its international footprint. This includes renewed efforts to expand in Australia. We’re supportive of this strategy.
Demand for veterinary services also remains robust, driven by an increase in pet ownership and a growing focus on pet health and wellbeing. That isn’t something we expect to change any time soon. The company’s strong network of practices and diagnostic laboratories continue to position it well to capitalise on these trends.
The group’s first half financial results showed revenue rose 11.4%. That said, inflationary pressures and rising costs have dented profitability, resulting in a cautious outlook from some analysts. We’re also mindful of the group’s warning that a sluggish economy could dent performance. Debt levels remain manageable.
Ultimately, we believe in the potential for a valuation recovery, and CVS continues to offer potential for those prepared to take on a bit more risk. But the final outcomes of the CMA’s investigation remain the main driver of sentiment, and that increases uncertainty.
Greggs – trading on track
Greggs has done what it needs to so far this year, reporting like-for-like sales growth of 7.4% in first 19 weeks of 2024.
It might have marked a slight slowdown from the beginning of the year, but with horrendous UK weather likely being a cause of the reduced footfall seen, it’s not something we’re worried about.
Despite the tough trading environment, performance has still been in line with the group’s lofty ambitions. It’s one of the reasons why investor sentiment towards the shares has been strong so far this year.
Despite being second only to Costa in terms of store estate in the UK, Greggs is still a business intent on growing, aiming to hit 3,000 UK shops by the end of 2026, 20% more than today.
It’s making good on its promises and management remain confident they can add another 140-160 new shops this year. Strong demand is not only supporting a larger estate, but also allowing Greggs to incrementally increase revenues at each store.
Evening trade still only accounts for 8.7% of company managed sales, so there’s a real opportunity from its extended hours, improved hot food options and the promotion of its loyalty programme.
Cost inflation is still expected to be around 4-5% for the year, but Greggs has worked hard to keep product prices competitive. Prices have risen just 16% since 2020, less than many of its peers.
While this is likely to be a small drag to growth, it means its famous value reputation remains intact and there’s still room to pull the price lever if needed.
Greggs might be laying the foundations for growth, but there’s still an attractive 2.5% prospective yield on offer. We still like the name but a reputation for strong performance of late means there’s plenty of pressure to deliver, increasing the risk of short-term volatility.
Lloyds Banking Group – getting its house in order
Lloyds Banking Group has seen its valuation rise significantly since the start of the year, with positive momentum maintained over the last three months.
A large dose of the optimism stems from a brighter economic outlook for the UK. As a bread-and-butter bank, avoiding a recession and robust consumer behaviour has helped lift sentiment.
The main thing to take away from the last quarter is that Lloyds has been getting its house in order. This has led to some stark-looking downturns in important metrics, including a 9% drop in net income in the last set of results.
But the over-arching message is that things are stabilising. Following the extreme interest rate circumstances we saw last year, the tougher comparisons were always going to result in some bumps in the road.
Lloyds has also maintained a focus on diversifying its income streams. This includes efforts to bolster things like credit card fee income, insurance and even investment management. We support these efforts, but would like to see some more detailed progress in the second half of the year.
One main development more recently is the FCA’s investigation into the mis-selling of motor finance, to which Lloyds has meaningful exposure. Around £450mn has been set aside to deal with any punitive action, but this could rise.
The reasons we picked Lloyds as a share to watch are still intact in our view, including the well-supported 6.0% dividend yield.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated, estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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