Investors’ Chronicle Report: Lloyds Banking Group, Reach, GSK

BUY: GSK (GSK)

According to Jennifer Johnson, GSK’s present strengths are undeniable, despite skepticism about its pipeline. The sales progress of the drugmaker is driven by the Shingrix shingles vaccine and its HIV franchise. In fact, the half-year results confirm this momentum, leading to an increase in full-year earnings forecasts. Turnover is expected to increase between 8 and 10 percent, and adjusted operating profit is predicted to rise by 11 to 13 percent. However, concerns remain about the concentration of GSK’s portfolio in certain therapeutic areas.

The patent cliff, which occurs when a drug loses its exclusive rights, is a challenge for pharmaceutical companies. GSK has faced concerns about patent cliff exposure and the size of its pipeline, but CEO Emma Walmsley has taken steps to address these. Recent achievements include the approval of the company’s RSV vaccine for older adults and the acquisition of Bellus Health, a Canadian biotech with a near-to-market treatment for chronic cough. Despite these efforts, GSK may still need more time to build a well-stocked pipeline. The company’s current valuation reflects this uncertain outlook.

Additionally, market jitters persist regarding the ongoing Zantac litigation in the US, which could impact GSK. Although the shares have rebounded in the past, they are still down 20 percent over the last year. With the next bellwether trial scheduled for November, some investors may approach cautiously. However, considering GSK’s current bargain price, it may be worth the risk.

HOLD: Lloyds Banking Group (LLOY)

Lloyds Banking Group’s correlation to the UK economy presents both benefits and challenges, as highlighted by Julian Hofmann. The bank’s half-year results show increased profits due to wider interest rate margins resulting from the Bank of England’s campaign. However, the market’s response was lukewarm, as Lloyds also faced a significant charge for bad loans and an uncertain outlook. Despite slightly below-forecast performance, the bank raised its margin guidance forecast for the year.

The widening spread between loan rates and deposit rates has positively impacted Lloyds’ net interest margin and return on tangible equity. However, rising levels of bad debt signal increased costs for many customers. Lloyds’ loan book has shrunk, and customer deposits have decreased. This trend may indicate that customers are seeking higher interest rate deals. Although the results are acceptable, they did not significantly impact consensus forecasts for the year. Lloyds’ low valuation suggests limited potential for significant market movement.

SELL: Reach (RCH)

Jemma Slingo mentions that Reach, the UK’s largest commercial news publisher, experienced a nearly 20 percent jump in shares after releasing its full-year results. While investors were pleased with print circulation revenue growth and projected profits matching expectations, there are concerns regarding digital sales and print advertising. Digital sales fell by 16 percent due to a decline in page views caused by Facebook’s de-prioritization of news content. Similarly, print advertising sales tumbled by 18 percent, resulting in an overall print revenue decrease of 2.7 percent.

Reach has taken measures to reduce operating costs and has benefited from lower newsprint costs. However, adjusted operating profit still declined by 24 percent. Statutory figures indicate an even bleaker picture with a 68 percent decrease in operating profit. Challenges also arise from the phasing out of third-party cookies, which makes it harder for publishers to sell ad space. Although Reach has registered 30 percent of its UK audience, digital growth remains stagnant, and the majority of readers remain unregistered.

Despite a tempting valuation with shares falling by 31 percent, caution is advised considering the uncertain economic backdrop and internal workings of the company.