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FTSE 250 incumbent Airtel Africa (LSE:AAF) is making significant progress in Africa, an emerging economic region. Based on recent news and current share price levels, should I add the shares to my holdings?

African economy

Airtel Africa is a provider of telecommunications and mobile money services as well as banking in Africa. It currently provides services and has a presence in 14 of the continent’s countries. Infrastructure spending in emerging markets is booming and expected to continue for the foreseeable future.

As I write, shares in Airtel are trading for 127p, whereas a year ago they were trading for 77p. This is a 64% return over a 12-month period. The FTSE 250 index has only returned 12% in the same period. Airtel shares are currently trading close to all-time highs.

Recent developments and performance

Airtel Africa last month reported its subsidiary SMARTCASH Payment Service Bank Limited has received approval in principle to operate a payment service bank business in Nigeria. This is a major deal for Airtel as this particular area of banking is growing fast in many African economies. Currently, there is a low level of banking products in the continent but wealth is rising, meaning there is demand for such products. Airtel should benefit from this.

Airtel also announced another major partnership in October. This was a partnership with payment firm Flutterwave. The partnership would see Airtel access further African countries and markets it has not broken into previously. This should help boost growth ahead.

Airtel’s most recent trading update, a half-year report for the period ending September 2021, was excellent. Revenue increased by over 25% compared to the same period last year. This was underpinned by growth in all its regions. Customer levels were up and it saw cash flow increase by over 40% to supplement its balance sheet. An interim dividend of 2 cents per share was declared, up from 1.5 cents in the same period last year.

FTSE 250 stocks have risks too

Airtel Africa’s operations are all centred around emerging markets, which is risky. When economic fluctuations and downturns occur, emerging economies can be the most volatile. Despite recent progress, the pandemic-related macroeconomic pressures could halt progress and growth if they were to continue. I view this as a short- to medium-term risk, however. Airtel also continues its growth trajectory through partnerships and acquisitions. Sometimes, corporate acquisition and partnerships don’t always yield growth and positive returns. This can also be more prevalent in emerging markets. Debt levels are also a bit higher than I would usually like. 

Overall I like Airtel Africa as a company and would add the shares to my holdings at current levels. Despite trading close to all-time highs, it still looks cheap with a price-to-earnings ratio of 12. In addition, it seems to have a clear path for growth and boosting its offering and profile. If growth and performance continues, investor returns should increase such as via dividends, which will likely make me a passive income.

Jabran Khan has no position in any shares mentioned. The Motley Fool UK has recommended Airtel Africa Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Ordering a delivery only to find the same meal much cheaper later on can be annoying. That might be a feeling familiar to shareholders in Deliveroo (LSE: ROO). The sinking Deliveroo share price has hit an all-time low. It floated at £3.90 in March and hit £2.02 in Friday’s trading.

Is this a bargain or a value trap?

Why is the Deliveroo share price cratering?

Deliveroo has consistently disappointed investors during its short life on the stock market.

Lately there’s been a raft of concerns for investors who continue to hold Deliveroo shares. Growing moves in Europe to grant workers’ rights to freelancers in the gig economy could impose additional costs on Deliveroo. That threatens to drive it to an even bigger loss. The founder and finance chief have both been selling shares, although the company said that this was to meet tax liabilities.

These concerns are weighing heavily on the Deliveroo share price.

How is the business doing?

The last update from the business was in October. At that point, the headlines were solid enough. What the company describes as “gross transaction value” was estimated to grow 60%-70% this year, an increase on previous estimates. Gross profit margin continued to be estimated at around 7.5%-7.75%.

Not everything was rosy, however. Average order value fell slightly. That could be seen as good, if it means that customers are willing to order delivery even on low ticket items. But it could also be bad for the company’s economics if it means the same cost base needs to be covered by lower revenues.

On top of that, while the gross profit margin news sounded good, I don’t think that metric ultimately matters to an investor like me. In the long term, it’s net profit that enables a company to pay dividends. So I don’t pay much attention to gross profit margin in isolation. The company’s pre-tax loss in its first half was £105m. I expect it to record a loss at the full-year level.

What could happen next?

Looking forward, I see some positive drivers for the Deliveroo business. Its revenue growth is very strong. A larger business will give it economies of scale which could help it improve its profitability.

I’m also not too worried by the prospect of higher cost due to changes in workers’ employment status. I think this is going to come in one form or another for companies such as Deliveroo but also rivals like Uber and Delivery Hero. Deliveroo already noted in its quarterly results that it is “exploring extending… enhanced (rider) entitlements to additional markets”. I expect such costs to be built into the economics of delivery services, including Deliveroo, a few years from now.

My next move on Deliveroo shares

Even after its heavy share price, Deliveroo commands a valuation of £3.7bn.

I think there is a lot of work to be done yet in establishing a sustainable position in the food delivery market. Currently companies like Deliveroo are continuing to build a position in the market. That is proving to be costly. I don’t like the economics of this business and see the risk of losses for years to come. Even the current Deliveroo share price doesn’t tempt me to add it to my portfolio.  

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Deliveroo Holdings Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Buying shares of Lloyds Banking Group (LSE:LLOY) is one of the most popular investments here in the UK. Yet as I’ve previously explored, the stock hasn’t exactly been a great performer. In fact, over the last five years, the share price has fallen by 26%. Considering the FTSE 100 only fell by 3% over the same period, I think it’s fair to say that Lloyds shares were not a smart investment back in December 2016.

But in 2021, the stock has actually managed to climb by an impressive 30%, leaving the FTSE 100 in the dust. Is this just momentum from the pandemic recovery? Or are there other tailwinds at play? Let’s explore whether I should be considering this business for my portfolio today.

Lloyds shares versus interest rates

Like any bank, Lloyd’s makes a good chunk of its income from charging interest on loans issued to individuals and businesses. But with interest rates being exceptionally low over the last decade, it hasn’t exactly created an ideal environment for it to thrive in. And when the pandemic struck, interest rates were again cut to nearly 0%. That’s fantastic for consumers – not so much for banks. 

With inflation on the rise, an interest rate hike seems inevitable in 2022. That’s obviously good news for Lloyds’ profit margins and could be one of several contributing factors behind the impressive performance of its shares in 2021. But suppose the Bank of England is correct in its assessment that rising inflation is only temporary. In that case, this tailwind may not last long. Fortunately, the company seems to have other tricks up its sleeves.

New management with a new plan

In August this year, shareholders welcomed Charlie Nunn as the new CEO. And with this change in leadership came a new growth strategy that intends to considerably expand the bank’s presence in the property sector. Traditionally banks issue mortgages to help individuals buy a home. But Nunn wants to take it one step further by also becoming Britain’s largest private landlord.

The objective is to buy 50,000 residential properties over the next 10 years and then rent them out to create a new and recurring stream of income. This move helps diversify the group’s revenue sources and makes its profits less dependent on interest rates that are beyond its control.

Needless to say, that’s good news for the price of Lloyds shares. And it’s why I think it’s a smart move by management. It’s too early to say whether Nunn’s strategy is working, but the most recent earnings report did beat earnings expectations by nearly 50%!

Taking a step back

Banks are complicated businesses with lots of moving parts. Unfortunately, this also means there is plenty of room for error. The original lending side of operations is constantly exposed to risks of loan defaults, even with rigorous credit checks. And the planned foray into the residential property sector could backfire if house prices suddenly start falling.

But if the new strategy succeeds, then the reward for shareholders could be substantial. However, I think there are better (and simpler) growth opportunities to pursue elsewhere. 

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

There are two types of companies: winners and losers. Often the market endorses a loser through the popularity of its stock. As human beings, we’re irrational and markets are inefficient. This means markets and people can often be wrong. That being said, I could be wrong about these FTSE stocks that I think are losers. However, my analysis of their current business models under current conditions has me convinced to steer clear.

Delivering losses

This one will sound blasphemous to some, but let’s face it — despite its more recent popularity, Ocado (LSE: OCDO) is a loss-making machine. In the 11 years since listing in 2010, it only turned over a profit between 2014 and 2017. Unfortunately, those profits were razor-thin. This hasn’t hampered the valuation of this stock in any way though. In fact at one point last year, Ocado was so popular with FTSE investors that it is was the UK’s most valuable retailer with an absurd £21.6bn valuation.

This was in spite of the fact that Tesco, which was valued at £21bn, sold 27% of the UK’s groceries last year. Ocado, on the other hand, had less than 2% market share. I get it, the technology driving Ocado’s platform is exciting. I like that it’s firmly in the green when it comes to debt ratios. However, despite surging sales during the lockdowns, somehow Ocado still managed to keep making losses. This is inexcusable in my opinion.

Turbulent skies

Rolls-Royce (LSE: RR) is next. The embattled aero-engine manufacturer recorded a loss of about £5.4bn last year. Unfortunately, this company is also drowning in debt. Sales of large engines from 2019 to 2020 halved and due to the uncertainty of the pandemic, fewer flying hours for planes means less servicing and therefore less revenue. The latest quarterly earnings showed a profit of £394m, which is good but not good enough. The great news for the FTSE 100‘s worst performer in 202o is its recent contract with the US Air Force. Rolls-Royce secured a £1.9bn deal to replace the engines on its Stratofortress bomber fleet. Since the vast majority of its business comes from civil aviation contracts though, I’m extremely sceptical given the current state of the industry.

Lights, camera, action?

The cinema business worldwide has battled over the past two years. That’s only natural given the Covid-19 situation. I, therefore, sympathise with Cineworld  (LSE: CINE). You don’t become the world’s second-largest cinema company unless you’ve got a solid model underneath you and perhaps that’s the bullish case for this FTSE favourite. However, with more restrictions looming on the horizon, I cannot see how any positive growth or earnings projections for this company can be assured. Even though movie fans flocked to cinemas to see James Bond last month, shares were still down 20% in November. Fortunately, there doesn’t seem to be any evidence that the growth of streaming platforms will damage this business model yet. However, with massive debts and losses piling up over the last 12 months, I won’t be sticking around for this show.

Stephen Bhasera has no position in any of the shares mentioned. The Motley Fool UK has recommended Ocado Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Investors in Boohoo (LSE:BOO) watched in horror yesterday as shares plummeted by just under 23%. This year hasn’t exactly been kind to this stock. And when combined with today’s continued downward trajectory, the 12-month return is a disappointing -67%.

But why are investors rushing for the exit? And has this panic actually created a fantastic buying opportunity for my portfolio? Let’s explore.

What just happened to Boohoo’s share price?

Yesterday’s tumble followed the firm’s latest earnings report. But despite what the large drop would indicate, earnings weren’t as bad as it may seem, in my opinion. Over the last nine months, sales at the online fashion retailer grew by double-digits, reaching £1.48bn. That’s 16% higher than 2020 and 65% more than was achieved in 2019.

In the meantime, Boohoo remains liquid with £70m of excess cash at its disposal. And at the same time, the construction of its new logistics network is proceeding on schedule. The first distribution centre is on track to become operational in 2023. And once the whole network is complete, management expects the company to have the capacity of achieving over £5bn in annual sales.

Needless to say, this is all quite encouraging, especially since performance does not appear to be dampened by the reopening of bricks-and-mortar fashion stores. So, the question is, why did Boohoo’s shares take a nosedive this week?

Looming problems ahead

As impressive as the total sales may have been, it wasn’t enough to offset management’s cut in guidance. Due to an increase in customer returns and ongoing disruptions courtesy of Covid-19 and the Omicron variant, Christmas sales performance may not be as explosive as initially anticipated. As such, the management team has adjusted its full-year guidance to investors’ dismay.

Total sales growth for its 2022 fiscal year ending in February is now expected to come in between 12% and 14% instead of the previous guidance of 20%-25%. Meanwhile, pandemic pressures on freight and transport costs are also expected to squeeze the already tight profit margins. Therefore adjusted EBITDA margin guidance was also cut to 6%-7% instead of the initial 9%-9.5% forecast.

Seeing a growth slowdown in a growth stock is not exactly a recipe for upward momentum. And with Boohoo shares trading at a premium for quite some time, I’m not surprised to see such volatility.

Is this actually a buying opportunity?

As frustrating as this cut to guidance is, the cause appears to be tied to Covid-19. And as devastating as the pandemic continues to be, it’s ultimately a short-term problem. Today, Boohoo shares trade at a price-to-earnings ratio of around 23. That’s certainly not cheap. But it’s far more reasonable than at the start of the year.

Combining this with a soon-to-be-launched distribution centre does make me believe a buying opportunity has emerged. Therefore, I am considering adding this stock to my portfolio today.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Penny stocks carry significant risks but some can provide lucrative returns in the long term. One pick I currently believe is dirt-cheap with plenty of upside for the future is Costain Group (LSE:COST). Here’s why I like it for my portfolio.

Construction boom

Costain is a leading UK-based construction and engineering firm. It looks to apply cutting edge technology to add value to its clients’ projects. Some of the sectors it operates in include rail, aviation, water, and defence.

Penny stocks are those that trade for less than £1. As I write, Costain shares are trading for 47p. At this time last year shares were trading for 17% higher, at 57p. The drop in share price is linked to a pandemic-related hangover, as well as continued pandemic issues, coupled with current macroeconomic issues.

Why I like Costain

The UK government has committed to spending billions on infrastructure projects over the coming years. Despite macroeconomic pressures (more on these later) affecting progress, a firm such as Costain should benefit from this capital outlay. Costain has a diversified business model with operations in different sectors and provides its services to public and private sector clients. Some of the public sector clients include powerhouses such as National Grid and the Ministry of Defence. Costain should be able to leverage its position to benefit from this demand.

Costain has a decent track record of performance despite difficulties caused by the pandemic. I understand reviewing its past performance is not a guarantee of any future performance. I like to review this to gauge investment viability and potential future capabilities. It has been a profitable business with an enticing dividend in the past. 2020 was a loss-making year, however, and dividends were cut because of the pandemic.

More recently, Costain’s half-year report was encouraging, however. It showed profit before tax increased to £9.4m. Revenue increased by 2%. Full-year results are due in March 2022. Analysts are predicting earnings growth of over 20% in 2022, which should help Costain back into the black. I do understand forecasts don’t always come to fruition, however.

At current levels I consider Costain a cheap penny stock. It sports a price-to-earnings ratio of just under 20. It has paid a dividend in the past and if it returns to profitability, this dividend could be reinstated. Dividends aren’t always guaranteed, however. Finally, and perhaps most importantly for me personally, it has an excellent, cash-rich balance sheet. This will help navigate recent stormy waters as well as support growth initiatives moving forward.

Penny stocks have risks too

Costain faces macroeconomic pressures such as rising inflation and rising costs. The cost of raw materials, especially those needed in construction and infrastructure projects, has been soaring. These rising costs can affect margins and profitability. Furthermore, the rise of new Covid-19 variants could have a negative impact on some projects too, like when the pandemic first started.

I look to invest for the long term and on that basis I would add Costain shares to my holdings at current levels. I believe it is primed to benefit from the construction and infrastructure boom and the billions of pounds the UK government has committed to spending in the longer term. A robust balance sheet and a diversified model help me justify my decision.

Jabran Khan has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

While the FTSE 100 navigates choppy waters, it is time to reflect on how some of the top UK companies performed this year. I have been bullish on Rolls-Royce (LSE:RR) throughout 2021. But with things looking dicey again with the surge in Omicron cases, is it time to revisit my stance on the Rolls-Royce share price? Is now a chance to buy at a discount or is the company in for a sluggish few years?

Is it a plane?

Christmas is a crucial period for the travel industry. But with governments imposing increasingly stringent international travel restrictions to curb the spread of the Omicron variant, the travel and tourism sector has taken another blow. More restrictions mean more stalled planes. And shareholders have been stepping away from travel stock. Industry giants Boeing and International Airlines Group are down 16% and 15% respectively in one month. In the same period, the Rolls-Royce share price is down 19%.

But there are reasons for me to believe that Rolls-Royce can recover better than other companies operating in the air travel space. And for this, I need to look closely at what exactly the company does and where its revenue comes from.

Pros and cons

The company is focused on its power systems and defence wings to offset the uncertainties with civil aviation. And according to the latest trading update published in November, this strategy could help the company secure a positive cash flow.

The aerospace and defence company has reduced operational costs in its aircraft repair operations and has significantly grown its order book in both sustainable power generation systems and defence vehicles. The $2.6bn deal with the US government for B-52 engines for the next 30 years brings Rolls-Royce’s defence order book to £6.8bn with 70% of the orders targeted for 2022. The power systems order book stands at £2.5bn with 20% deliverable in 2022.

The firm has shed 8,000 positions in the civil aerospace division, streamlining operations to improve profits. But the net debt was still at a whopping £3.1bn in August 2021. Although the company expects to raise free cash to £1.3bn by the end of 2022, I expect debt to eat into revenue well into 2024.

And RR is currently in the midst of some incredible R&D efforts in nuclear power systems and electronic aircraft engines. These cash-intensive efforts require time to reach profitability. And I expect any further interruptions in commercial air travel to dent revenue this year and beyond. Right now, air traffic is at 50% of pre-pandemic 2019 levels. France’s travel restrictions for tourists from the UK could cause a domino effect across Europe. This could bring the industry to a temporary standstill like in 2020.

Rolls-Royce share price verdict

The future of the Rolls-Royce share price is connected to many different factors beyond the company’s control. Although the business is restructuring and looking to diversify revenue streams, civil aviation remains its biggest cash cow. And with so much uncertainty right now with travel and tourism, the share price could drop further.

And given the inflation in the UK, I expect a laboured recovery for the tourism sector. People might be reluctant to splurge given how shaky things look right now. While I think the company offers good long-term growth potential, I think I will wait and figure out where Omicron take us before investing in Rolls-Royce.

Suraj Radhakrishnan has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The stock market has had a strong year, giving many investors reasons for cheer. But doubts remain about the strength and sustainability of the economic recovery. Some analysts worry that if the market keeps growing faster than the economy, at some point there could be a stock market crash.

I’m not that worried, as I think such crashes are part and parcel of being an investor. In fact, if there is a correction I’d consider using it to pick up some shares for my portfolio. Here are two of them.

Diageo

While the name Diageo (LSE: DGE) might not be familiar to many people, its products certainly are. The company is behind drinks from Baileys to Johnnie Walker.

There are several things I like about the business. Its portfolio of premium brands gives it pricing power. That allows it to raise prices, which should help it maintain profit margins even in the face of inflationary concerns.

I also like the fact that the company covers a wide range of drinking occasions. It has super premium products like Johnnie Walker Blue Label but also more everyday brands such as Guinness. It even has non-alcoholic beverages such as Seedlip, which could help mitigate the revenue risk of falling alcohol consumption among younger consumers. This broad spread of products to meet different budgets and tastes enables Diageo to appeal to a large customer base globally.

In fact one of the few things I don’t like about Diageo is its share price. Currently it trades on a price-to-earnings valuation of 34, which like some of the company’s products is a bit rich for my taste. If a stock market crash brings the Diageo share price down, I’d consider taking advantage to add it to my portfolio.

Judges Scientific

A very different sort of company is instrument maker Judges Scientific (LSE: JDG). It has a narrow customer base, focussing as it does on users of precision equipment such as research laboratories. Like Diageo, though, it has pricing power. Quality matters in such an environment, so customers are willing to pay for the premium products supplied by Judges.

The business model appeals to me too. Judges maintains a small corporate presence, which allocates capital and helps its subsidiaries optimise their performance. Other than that, it mostly leaves them to get on with things. It buys such companies at disciplined valuations. That means that it can turn a healthy profit without being burdened by heavy overheads.

That profitability has translated into double-digit dividend increases year after year. That isn’t guaranteed, though. Demand shocks due to travel restrictions limiting the company’s ability to install equipment could hurt profits, for example.

Companies like this are rare and Judges’ valuation reflects that. With a P/E ratio of 46, I won’t buy it right now for my portfolio. But if a stock market crash brings the Judges Scientific share price down, it’s on my shopping list.

Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo and Judges Scientific. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.