Tesla shares fell in US trade yesterday as the electric vehicle maker reported a material compression in operating margins and a slump in cash generation due to a broad price reduction.

Tesla has slashed the price of their vehicles in an attempt to attract more customers. After a series of price cuts over the past year, the Model 3 now starts at less than $40,000.

Increasing competition would have been a factor in deciding to build market share on pricing as traditional automakers ramp up investment in their EV offerings. Tesla has been seen as a premium brand, and the move to lower prices will diversify their customer base before traditional car makers snatch share in the budget area of the market.

“Tesla is still an aspirational brand in the USD 60,000-120,000 range. EVs from traditional premium automakers are still playing catch-up with Tesla in terms of performance and the overall user experience,” said Orwa Mohamad, Analyst at Third Bridge.

The move has shown early signs of success with robust revenue figures. Revenue for Q1 2023 was 24% higher than the year prior at $23.3bn – but was lower than the $24.3bn generated in Q4 2022.

Operating margins in Q1 were 11.4% compared to 19.2% a year ago.

The prospect of lower operating margins for the foreseeable future was the overriding factor in sending Tesla shares down 7% in the pre-market.

“Margins were always going to be in the driving seat when it came to determining market sentiment this quarter, following Tesla’s sixth round of price cuts in the US this year,” said Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown.

“While the group’s valuation is in a more reasonable position than it has been, it’s still vulnerable. A large reason for this is it’s unclear where margins are going to settle as price cuts continue to come through the line, the extent of which can’t be fully mapped at this point, and which could see margins losing further traction.”

UK stocks started the day deep in the red following the release of UK inflation data which raised the prospect of additional rate hikes by the Bank of England.

London’s leading index recovered some of the losses throughout the session and was trading down just 0.2% at 7,893 at the time of writing. The index had touched lows of 7,871 earlier in the session.

The more UK-focused FTSE 250 was down 0.6%. Most other major European equity indices were in positive territory.

The decline in UK stocks was sparked by worries about the next move by the Bank of England’s voting committee which will now have to factor in UK inflation at 10.1% – higher than economist’s estimates.

“The Bank of England remains under pressure to keep a lid on inflation, so we can’t rule out another rate rise in May,” said Sarah Coles, head of personal finance, Hargreaves Lansdown.

Markets quickly priced in additional rate hikes to interest rate futures.

FTSE 100 risers

British American Tobacco was the FTSE 100’s top riser on Wednesday after the tobacco company said they expected organic revenue growth of 3-5% in the year ahead. It also noted sharp growth in their non-combustibles business which now accounts for around 15% of revenue.

British American Tobacco shares were 3.5% higher at the time of writing. Imperial Tobacco jumped on BATS’ coattails and rose 2%.

FTSE 100 fallers

Fresnillo fell 2% as the possibility of higher interest rates sapped interest for precious metals. The silver miner fell as gold retreated 0.2% and silver reversed sharp losses to trade 0.1% higher.

Higher inflation driven by soaring food prices is a source of concern for the UK’s shoppers who will likely steer away from Ocado’s premium online shopping services. Ocado shares were down 2% on Wednesday as investors steered away from their equity.

Oil prices were down around 2% on Wednesday making BP and Shell less attractive – BP was down 2% while Shell slipped 0.8%.

Investors are now questioning whether Woodbois (LON:WBI) will survive one of its lenders asking for its money back?

The £9m market capitalised business is involved in Africa-focused forestry, timber trading and afforestation.

Sydbank, which has provided various banking arrangements to Woodgroup ApS, a group wholly owned subsidiary, has called in the $6m debt facility.

Having a floating charge against the subsidiary assets, which include a $3.1m cash balance, Sydbank has heavy power against the company. The cash will be immediately used to offset part of the $6m facility.

Woodbois has until the end of May to come up with a method or a scheme for the repayment of the $2.9m balance.

The group’s broker Canaccord Genuity has placed its rating on the group’s shares as “Under Review” so that worries investors even more than the sudden totally unexpected cash demand.

Restructuring advisers have been called in and the group is undertaking a “concerted contingency planning exercise” – understandably in reaction the group’s shares have collapsed this morning by some 65% to 0.36p after hitting 0.22p earlier.

Lloyds shares have recovered from the mini-banking crisis but are still significantly below their recent highs. With the Lloyds share price hovering below 50p, many will be considering buying the stock at these levels.

Here are two reasons why.

Lloyds dividend

The Lloyds dividend is becoming increasingly attractive. After many years of pitiful payouts following the financial crisis, Lloyds dividend has steadily increased to now yield 4.9%.

The bank hiked their 2022 full-year dividend by 20% demonstrating a willingness to bolster shareholder distributions. One would expect this policy to continue in the future. The dividend is well covered, leaving plenty of space for higher dividends without causing too much pressure on cash generation.

Lloyds profit doubled last year and key profitability measures such as net interest margin are expected to be steady in the year ahead.

The favourable dividend will make Lloyds a cornerstone position in the income portfolios for many investors.

Valuation

The capital appreciation prospects for the Lloyds share price are clear. However, the outlook for the UK economy may make the journey to substantial gains for Lloyd shares a bumpy one with a number of risks to consider.

The mortgage market is improving but many economists are predicting a slowdown in the UK housing market. A material decline in housing activity will be a concern for Lloyds mortgage and lending business and may lead to more impairment charges.

Nonetheless, on a historical basis, Lloyds trades at an attractive PE Ratio of 6.2x. Lloyds Price-to-book ratio is just 0.7x. These are valuations that are hard to ignore.

One should remember, there has been an ongoing distortion of UK banking valuations compared to US and European peers since the pandemic. This makes Lloyds current value seem cheap not only to the FTSE 100 average but good value on a relative basis compared to international peers.

Should Lloyds rerate in line with either the FTSE 100 average or international peers, the upside from here would be outstanding.

The big question is how long this disconnect from peer valuations persists.

The FTSE 100 carved out minor gains on Tuesday as mixed data from the UK and China provided insight into two of the world’s major economies.

China’s economy expanded faster than expected in the first quarter growing 4.5% vs the 4% estimated by economists. The data is good news for the global economy and will be particularly helpful for the FTSE 100’s natural resources sector.

“The relaxation of Covid restrictions was always going to result in stronger economic activity. The key question is for how long it can sustain this momentum,” said Russ Mould, investment director at AJ Bell.

The UK’s economy showed another sign of slowing down on Tuesday with a rise in unemployment and a decrease in job vacancies. The UK’s unemployment rate rose to 3.8% from 3.7% in the three months to February. Average wage growth accelerated to 5.9% in the year to February.

“The UK economy is already flatlining with high inflation a pernicious force, but there’s been a fall in vacancies and rise in unemployment, which should add to disinflationary forces building up,” said Susannah Streeter, head of money and markets, Hargreaves Lansdown.

“Open positions are down 4% on the January to March quarter compared to the previous three months, while the unemployment rate rose to 3.8%. This is likely to be music to the ears of Bank of England policymakers, who want to see evidence that the tight labour market is easing, before taking the pedal off rate hikes.”

As indicated by Streeter, the bad news in the economy may prove to be good news for equity markets looking forward to the eventual slowdown in rate hikes.

FTSE 100 risers

Entain shares were up 5.8% at the time of writing after the betting company released a positive Q1 trading update. Their US joint venture provided a reason for optimism, with 70% revenue growth over the period.

“The cost-of-living crisis can’t deter punters from enjoying a flutter across Entain’s suit of brands, including Ladbrokes and partypoker to name a couple. First quarter performance was strong, albeit mainly in line with market expectations, with active customer numbers reaching record levels,” said Matt Britzman, equity analyst at Hargreaves Lansdown.

Miners were among the top risers following the better than expected China GDP data. Fresnillo gained 3% to 799p while Anglo American added 2.8% to 2,791p.

Also helping Fresnillo higher was an upgrade by UBS, who raised Fresnillo to ‘neutral’ with an 825p price target.

FTSE 100 fallers

Despite an upgrade from UBS, Centrica was the FTSE 100’s top faller at the time of writing shedding 2% of its value. The utilities company has added 50% from their October lows and today’s decline can be attributed to profit-taking.

GSK was down 1.3% after agreeing to acquire Bellus Health Inc for $2bn.