Robert Stephens, CFA, focuses on two FTSE 100 stocks that could experience improving trading conditions.
The Covid-19 lockdown has been extremely challenging for FTSE 100 shares Auto Trader (LON:AUTO) and Associated British Foods (LON:ABF). The inability of consumers to visit non-essential retail locations means the two companies have reported significant declines in sales and profitability.
With the UK economy scheduled to gradually reopen in the coming months, both firms could experience a marked improvement in their operating conditions. Furthermore, a forecast economic recovery could sustain rises in their share prices over the long term.
Although Auto Trader is an online-focused business, it relies on consumers visiting showrooms to purchase vehicles. As a result, lockdown measures caused a 37% fall in sales in the first half of its financial year. Further declines in the second half of the current financial year are likely, since containment measures have remained in place.
Looking ahead, the firm could experience an improving trading environment as lockdown restrictions abate. Its performance could be catalysed by the release of pent-up demand, with UK consumers saving at record rates during lockdown.
Those savings may be channelled towards vehicle purchases, as many consumers appear to have postponed changing their vehicle during Covid-19. This is evidenced in the decline in used car sales of 14.9% in 2020. When combined with a forecast 5.9% UK economic growth rate in 2021 and increasing environmental concerns among many consumers that may prompt a switch to electric vehicles, the prospects for the automotive industry may be relatively positive.
Undoubtedly, Auto Trader’s forward price-earnings ratio of 26 suggests investors are anticipating a stronger performance from the firm. However, its asset-light business model and digital focus suggest it is capable of adapting to changing consumer tastes in a resurgent UK economy. This could mean it delivers rising profitability that justifies its relatively rich valuation.
Associated British Foods
ABF has also suffered greatly due to lockdown measures. The owner of Primark reported a 40% decline in retail sales in the first half of its financial year. Even though it has a diverse range of operations that extends to ingredients, sugar and agriculture, its overall performance in the current year is likely to be severely impacted by ongoing retail closures.
However, as the UK economy reopens, the firm could experience a significant improvement in sales. When its retail locations reopened prior to the current lockdown in the first half of the year, they delivered a 15% decline in like-for-like sales. This was a relatively strong result, given reduced footfall caused by government advice to remain at home. It suggests that consumers could return to its stores as containment measures are eased. They may also be drawn by the novelty of being able to visit non-essential retail locations, which could provide a sales boon for ABF.
Clearly, the firm is likely to be impacted by the performance of markets outside the UK that may relieve lockdown measures at a slower pace. Moreover, its lack of digital retail presence may restrict its long-term growth prospects.
Equally, though, its budget price point focus may appeal to consumers. Meanwhile, its forward price-earnings ratio of 16 suggests it could offer good value for money given its diverse business model and the potential for improved operating conditions.