It’s not just us looking forward to summer 2023. Businesses are too. This is the first disruption-free summer since the pandemic, and that should mean more people spending more money.
That said, consumers are still feeling the pinch thanks to sky-high grocery and borrowing costs. But we think there are some companies that stand to generate balmier climes for investors.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments will rise and fall in value, so you could get back less than you invest.
Investing in individual companies isn't right for everyone because if that company fails, you could lose your whole investment. If you can’t afford this, investing in a single company might not be right for you. You should make sure you understand the companies you're investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.
easyJet
It might seem obvious to put an airline on a list of summer share ideas, but hear us out. There are some easyJet specific strengths we think are going underappreciated by the market.
Let’s start with wider market dynamics. Despite the pressure on incomes, it’s clear that summer getaways are very important for consumers. British Airways owner IAG, TUI and easyJet have all said that demand for summer bookings is strong and capacity is inching towards, if not already at, pre-pandemic levels.
In the second quarter, easyJet passengers increased from 11.5m to 15.6m, and planes were 88% full on average compared to just 78% 12 months ago. Total group revenue for the first half is expected to be up over 80% at around £2.7bn, following ‘strong’ demand and revenue earned from add-on services.
It’s those added extras, known as ancillary revenue, that sets easyJet apart. And sales are particularly strong. These are lucrative and a well-built marketing proposition is giving an extra push to things like food and extra legroom.
easyJet’s routes are also more favourable than competitors. The group’s planes fly into premium hubs rather than cheaper slots on the outskirts of favoured locations. It’s also taken the opportunity to strengthen its position at major airports while weaker competitors struggled during the pandemic.
As ever, nothing’s perfect. Mapping demand is tough from here on out and will depend on the economic landscape. Things like wage inflation and the possibility of labour disruption at airports are also risks which might affect the market’s short-term view of the stock.
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DS Smith
DS Smith is a packaging giant. Its main customers are fast moving consumer goods (FMCG) companies, as well as retail and e-commerce. Cardboard might not sound too exciting, but the truth is, modern life doesn’t function without it.
Consumers are continuing to spend on non-essentials despite the cost-of-living crisis, and we’d expect this to continue this summer. After all, it’s the time of year people prioritise fun and excess.
But that’s not to say demand for all DS Smith’s customer’s products will be shooting the lights out. There has been a dip in demand for DS Smith’s boxes and packaging as areas of the economy face difficult conditions. But price rises by the group have offset the bulk of this.
Analysts currently expect full year revenue to rise just over 14%, which is slower than it has been. This isn’t bad going in our opinion and reflects the essential nature of DS Smith’s products. This level of demand also feeds into a prospective yield of 5.8%, but remember yields are variable and not a reliable indicator of future income. No dividend is ever guaranteed.
We think DS Smith is primed to benefit from the better-than-expected resilience of consumer spending over the summer months. We don’t think that strength is fully reflected in the valuation. However, this does also highlight the ongoing uncertainty in corners of the economy and there are no guarantees.
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Tesco
UK supermarkets are likely to enjoy a boost over the warmer weather. Also, just like during jubilee celebrations, we think the recent coronation bank holiday will buoy the top line. A broader shift towards celebrating and entertaining at home should play into Tesco’s strengths.
We can’t sugar-coat it though, the grocery sector is a tough place to be right now. Consumer data shows grocery spending is below the rate of supermarket inflation. People are counting the pennies. That’s putting pressure on margins as the big names race to the bottom on prices to attract and keep customers.
We think Tesco is well-placed to compete in this difficult climate, thanks to its leading market share, strong online footprint, and the success of its Aldi price match campaigns.
Operating margins are currently hovering around the 4% mark, which doesn’t leave too much room for manoeuvre. It’s important to monitor the extent to which any bumper summer sales are being pulled forward. This essentially means they’re being taken from the future, which might spark a slowdown in spending later in the year.
Ultimately, we need to put dinner on the table no matter what. The grocers offer a certain amount of revenue reliability. The short term is likely to be a mixed bag. However, we think Tesco is in a good position to maintain its leading position as we gear up to spend more over the summer months. Keep in mind, last year’s heatwave might make comparisons a bit tough.
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An independent Non-Executive Director of Hargreaves Lansdown plc is also an Independent Non-Executive Director of easyJet plc.
Unless otherwise stated, estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates aren’t a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.
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