Markets await rates and tech results, LVMH update lacks sparkle, Dowlais merger fails to impress, WH Smith’s travel joy, ASML beats expectations, Pennon rights issue and Starbucks relief

“DeepSeek’s appearance on the scene might have caused a shift in the narrative for tech stocks but it hasn’t been the catalyst for a sustained market sell-off,” says Russ Mould, Investment Director at AJ Bell.

“US markets rebounded yesterday and look set to continue on the same path today ahead of two major events.

“First up is the Federal Reserve’s latest interest rate decision where markets are expecting no change. The US economy is proving to be resilient and the central bank might find it hard to justify cutting the rate of borrowing.

“More important to investors will be the next set of numbers from the Magnificent Seven, beginning today with Microsoft, Meta and Tesla. This trio have the power to move markets given their size and keen investor following. The market will be watching closely for updates on AI spending and usage by Microsoft and Meta, together with any new commentary on DeepSeek’s arrival and cost advantages. Tesla will be all about margins and production expectations in a patchy period for electric vehicles.

“Raspberry Pi’s share price crashed by 7% at the market open but quickly bounced back as investors tried to work out if its update should leave a sweet or sour taste. The company implied things were picking up, but the language in its outlook statement contained a few references that might spook investors, such as ‘a challenging’ backdrop and saying that ‘medium-term’ fundamentals remain positive. Investors typically care more about the short-term.”

LVMH

“It might be too early to call a big improvement in the luxury goods market, judging by LVMH’s latest results. They are not a disaster, but neither do they sparkle. The business is moving sideways rather than making strides on the catwalk.

“Richemont and Burberry’s recent updates injected some excitement into the sector amid signs that people were splashing the cash on luxuries once again. LVMH’s tills are ringing, just not often enough to win over investors as the shares fell on the update.”

Dowlais

“It could be time to say farewell to Dowlais before it’s had time to properly prove itself as a standalone listed business. Spun out of GKN in 2023, shares in the business subsequently halved in value as it drove into a foggy patch for the car industry.

“American Axle & Manufacturing’s merger proposal has come out of the blue as Dowlais hadn’t put itself up for sale. However, consolidation is inevitable when an industry goes into a downturn as operators look to combine forces, achieve economies of scale and be in a stronger position to grab opportunities when market conditions pick up.

“This is far from a done deal and there is a real chance that Dowlais shareholders push back for a better offer. The fact the shares only traded at 73.8p versus an implied 85.2p takeout price (which includes up to 2.8p dividend) suggests the market doesn’t believe the deal will succeed in its current form.

“The bid premium looks very skinny at 25%. AJ Bell calculates the average bid premium for UK-listed stocks was 47% in 2024 and 52% in 2023. AAM’s offer values Dowlais at 4.1 times EV/EBITDA which is bargain basement territory, essentially valuing Dowlais as if it had failed its MOT and was on the verge of being put on the scrap heap.

“There is also the fact AAM’s offer is structured in cash and shares. Investors typically prefer hard cash in their pocket. The biggest shareholders are asset managers Fidelity, Select Equity, T. Rowe Price, Capital Research Global Investors and Aberforth Partners. They’re looking to make the strongest returns on their investment as possible and won’t be pushovers.

“Dowlais’ share price might have gone in reverse for much of its short life as a listed entity, but it has been moving upwards since last November which suggests investors were starting to gain more confidence in the business. They may not want to see it join forces with a US-listed company at this fork in the road.”

WH Smith

“It’s no coincidence that WH Smith announced the potential sale of its UK high street operations just before reporting good trading for the travel arm. It needed the core business going forward to be firing all cylinders in order to justify the strategic shift.

“Importantly, the travel arm is regaining strength after getting stuck in the mud in North America. There had been concerns that the operations hit an obstacle in the road, causing momentum to grind to a halt. That now looks to have simply been a blip and momentum is gathering pace once again.

“The future of WH Smith now rests with getting travellers to pay the price for convenience. Its stores at transport hubs take advantage of a captive audience – people don’t have time to shop around, they simply want to pick something up quickly before they catch a train or flight. If someone needs a charger or a new phone as a matter of urgency, they’ll pay whatever is being charged.

“WH Smith’s task is to secure slots in more transport hubs around the world so it can milk the traveller for everything they’ve got. Once the UK operations are sold, WH Smith’s management should have a sharper focus on the remaining business and potentially new energy across the group to take advantage of growth opportunities.”

ASML

“ASML is one of the picks and shovels plays on the AI theme shaken by the emergence of Chinese AI innovation DeepSeek, so better-than-expected fourth-quarter earnings will be a relief to investors.

“The company makes kit used in the manufacture of high-end chips and is seeing strong demand for some of its most advanced tools.

“However, while the company is positive on the outlook and this makes sense for 2025, for which much of its customers’ spending is likely already allocated, it will take time to understand if the demand profile will change thanks to DeepSeek for 2026 and beyond.

“Chief executive Christophe Fouquet is clear that AI is the key driver of growth for the industry so if developing generative AI becomes less complex and cheaper, it could be bad news for ASML and other names in the semiconductor industry given sluggish demand for chips for smartphones, tablets and personal computers.”

Water utilities: Pennon AND United Utilities

“Water utilities are struggling to keep anyone happy. Already in the bad books with politicians, regulators and the public over the levels of pollution in Britain’s seas and rivers, Pennon is now having to go cap in hand to investors through a rights issue.

“The owner of South West Water plans significant capital expenditure in the coming years to fix its infrastructure and needs to bolster its coffers to sustain this spending. Both Pennon and United Utilities, which announced its own bumper investment plans, are also looking to grow their dividends in line with inflation through to 2030.

“While this steady drip of money to shareholders is unlikely to go down well with households facing higher bills, the hard reality is that these companies need to keep the market onside in order to meet their commitments now and in the future.

“Poor performance over several years from the perspective of customers and shareholders means these companies don’t have much goodwill to count on and precious little margin for error on delivering what they have promised.”

Starbucks

“Starbucks’ latest quarterly update didn’t give the shares the jolt of a shot of espresso, more the modest boost of a short latte.

“There were some signs of progress as recently appointed chair and CEO Brian Niccol seeks to turnaround its fortunes but a smaller-than-expected drop in comparable sales doesn’t mean the picture is bright, just less cloudy than anticipated.

“The company is focusing on improving the customer experience, in particular wait times, and is simplifying its menu which should reduce costs. Starbucks is also looking to tap into nostalgia for the brand’s heyday when it was at the forefront of the coffee shop explosion in the 1990s.

“While the policy to insist people buy something if they’re using Starbucks as a place to work or socialise makes sense, the company needs to be careful about executing this strategy in a draconian fashion. No-one wants to go to a place where your every movement is being policed.

“Niccol’s appointment was received positively when it was announced last August thanks to his achievements at Chipotle Mexican Grill. He will need to demonstrate signs of more tangible progress at Starbucks through the course of this year to show things are genuinely getting better rather than less bad.”

These articles are for information purposes only and are not a personal recommendation or advice.