Questor: Rolls-Royce, easyJet, WPP, Burberry – do we need to offload these stocks now?

Today we continue our recent theme of reassessing past selections in light of the spread of coronavirus.

Fortunately, many of the companies we have tipped have solid balance sheets, which should help them to survive weaker trading conditions.

Global challenges

Burberry was one of our first selections to report trading disruption caused by coronavirus. It closed 24 of its 64 shops in mainland China last month and similar closures are now in place across its global store estate.

Weak demand is likely to hit its profits this year. However, Burberry’s net cash position and the strength of its brand suggests that it has long-term recovery potential. Hold.

Likewise, BAE Systems, the aerospace and defence firm, has a solid financial position. Its interest payments were covered seven times by operating profits last year.

Although defence spending growth may moderate in the aftermath of the epidemic, as it did following the financial crisis, Questor views BAE’s long-term outlook as positive. Hold.

WPP, the advertising firm, is likely to report a significant deterioration in its financial performance. As a cyclical business, its profitability is strongly correlated with the performance of the world  economy.

However, its efforts to reduce debt under a revised strategy have made it significantly less risky. For example, its net debt fell from £4bn to £1.5bn last year. Short-term pain for investors is highly likely, but we’ll hold on in anticipation of a long-term turnaround in its share price. Hold.

Aviation

Airlines are likely to be among the hardest hit by coronavirus. We can expect travel to be severely restricted for weeks if not months.

EasyJet is, therefore, one of our most exposed selections to the financial impact of coronavirus. Last week it highlighted cost reductions across its business to offset its reduced revenue.

The company has modest net debt of £326m and profits exceed interest by 13 times. It also has no debt refinancings due until 2022. Government support could help to prevent further deterioration should travel restrictions remain in place over a prolonged period.

On a risk/ reward basis we think investors should seek to ride out the challenges that face EasyJet and hold on to the stock.

Rolls-Royce is also likely to be affected: it makes engines for airliners and a slowdown in demand could inhibit its growth in the medium term.

The firm had difficulties before the emergence of coronavirus: its Trent 1000 engines have suffered unexpected repair costs that have damaged its financial progress. But we think it has long-term recovery potential, while its £1.4bn of net cash suggests it has solid finances. Hold.

Property

Britain’s housing market faces an uncertain future. Buying a new home is unlikely to be a priority for many people, which could hurt the prospects for our recommendations in the housebuilding sector.

Questor has been acutely aware of the potential for a slowdown in the property sector for a couple of years. Therefore, our recommendations have focused on companies that have substantial net cash, which should enable them to overcome any slowdown in trading.

Dividend growth may slow across the housebuilding sector, but we remain optimistic about the long-term prospects for Berkeley Group, Barratt and Taylor Wimpey while interest rates remain low.