The HRL Holdings Ltd (ASX: HRL) share price is surging today on the back of a guidance and trading update.

At the time of writing, HRL Holdings shares are up 20.69% to 10.5 cents in late afternoon trade. With this rise, the company’s market capitalisation currently stands at around $52 million.

HRL Holdings provides sampling, laboratory testing and data management services across Australia and New Zealand.

The company’s customer base comprises companies within the food, environmental, occupational hygiene and construction industries.

FY20 guidance

HRL’s guidance update is likely what has been spiking investor interest today. Although HRL noted that future mid-term activity levels remain difficult to accurately predict, it provided an update on its current financial performance.

The company expects FY20 revenue to land in the range of $32 million to $32.7 million, up from FY19’s revenue result of $30.7 million. 

Meanwhile, underlying earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to be between $5.5 million and $5.8 million, up from $4.5 million in FY19. HRL was quick to point out that analyst consensus of underlying EBITDA is $4.8 million.

Trading update

Along with the guidance, HRL also shed light on recent trading conditions.

As previously announced, the company’s New Zealand business has been impacted by the nationwide lockdowns. During alert level 4 which was in place from late March through to late April, only HRL’s food and water testing laboratory operations were permitted to remain open.

However, all New Zealand operations recommenced in mid-May when restrictions were relaxed to alert level 2. The company stated that trading is improving but still below pre-COVID-19 volumes.

On a positive note, HRL’s Australian businesses continued to trade without interruption during April and May.

On the whole, HRL noted that fourth quarter trading conditions benefited from the company’s ability to operate “essential services” food testing for honey and dairy, combined with a strict cost control strategy that has been executed across the business.

In terms of cash, operating cashflows over the second half of FY20 have been positive and HRL stated it remains “significantly” within banking covenants.

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Motley Fool contributor Cathryn Goh has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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ASX bank shares such as Commonwealth Bank of Australia (ASX: CBA) have been on a tear over the last few weeks. Even though CBA shares have pulled back today (at the time of writing), they’re still up more than 17% since 25 May.

And it’s not just CommBank. The other ASX major banks Australia and New Zealand Banking GrpLtd (ASX: ANZ), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) have all seen similar, if not more enthusiastic moves in recent weeks.

Now, that’s all well and good for any shareholder that picked up ASX bank shares any time over the last 2-3 months.

But what of the long-term prospects of our big 4? Well, one ASX fundie isn’t betting the house (or even the barn) on a triumphant return to banking supremacy and flowing ASX bank dividends.

Are ASX bank dividends in trouble?

According to reporting in the Australian Financial Review (AFR), Airlie Funds Management’s portfolio manager, Matt Williams is holding a more bearish view of the banks for the coming months and perhaps years. Williams has stated that the banks are set to bear the brunt of the withdrawal of various government stimulus measures.

The federal government has embarked on the largest social spending program in history. Measures like JobKeeper and the coronavirus supplement payments for those on JobSeeker and other government payments launched in an attempt to blunt the edge of the coronavirus’ impact on the economy.

But, as Williams points out, these measures were never designed to be permanent and are heading towards a wind-down phase in the coming months. When this happens, Williams warns that the banks will bear the full impact of this cliff:

“They are the backstop for all this and how this plays out over the rest of the year… we’ve got 10 per cent of mortgages on deferral [and] 6 per cent of SME loans on deferral. So … as some of the stimulus is withdrawn, what’s going to happen to the bad and doubtful debt charge?”

As a result of this, Mr Williams is saying the banks will struggle to return to paying the level of dividends investors have become accustomed to in the past, stating:

“I think that’s clear from the crisis, they are paying too much in dividends. I think conservative boards will really rein in that payout ratio. So I think with dividends shrinking a bit, it’s hard… to make a really strong bullish case for the banks.”

What does this mean for ASX investors?

I think Mr Williams has a very strong point here. And anyone who holds ASX bank shares should be thinking very carefully today about what to expect from their banks over the coming years. There are a lot of headwinds right now in the banking sector, without the company of too many tailwinds. Low-interest rates aren’t good for bank’s profitability or their ability to fund dividends. Neither is sluggish economic growth and reduced appetites for credit. These are all factors the banks are facing today (and will probably continue to face for years).

As such, I have to agree with Mr Williams in not being too bullish on the future of the banks for the next year or so – especially from a dividend investing perspective. Farther than that? Frankly, who knows. But it’s not a risk I’m willing to take today, that’s for sure.

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Motley Fool contributor Sebastian Bowen owns shares of National Australia Bank Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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The Wesfarmers Ltd (ASX: WES) share price has been caught up in the selloff on Thursday and is dropping notably lower.

At the time of writing the conglomerate’s shares are down 3.5% to $42.30.

Is the Wesfarmers share price in the buy zone?

I think this pullback could be a buying opportunity for investors looking for strong blue chip shares to buy for the long term.

Thanks to its collection of quality businesses such as Bunnings, Kmart, and Officeworks, I believe Wesfarmers is well-positioned to achieve solid earnings and dividend growth over the next decade.

Another positive is the hefty cash balance the company is sitting on following the sale of part of its stake in supermarket giant Coles Group Ltd (ASX: COL). I expect these funds to be used to make earnings accretive acquisitions in the near future.

Overall, I think this puts the Wesfarmers share price is in the buy zone right now. Though, not everyone is as positive on the company as I am.

A note out of Goldman Sachs this week reveals that its analysts have placed a neutral rating and $42.50 price target on the company’s shares.

Why is Goldman lukewarm on Wesfarmers?

The broker explained that its neutral rating is due to valuation reasons.

Using a sum of the parts and discounted cash flow valuation model, it sees $42.50 as fair value for its shares. This means there is limited upside for investors over the next 12 months, even if you include dividends.

Though, it does see a number upside risks that could lead to a positive revision to its valuation. These include improvements in consumer sentiment around discretionary purchases, a faster turnaround of the struggling Target business, value accretive acquisitions, capital management, and favourable rental negotiations.

However, until these potential factors become a reality, Goldman is sticking with its neutral rating.

Instead, it prefers Harvey Norman Holdings Limited (ASX: HVN) in the retail sector. This morning it put a buy rating and $4.05 price target on its shares.

More reading

• Why I think Wesfarmers is the best ASX blue chip
• Leading brokers name 3 ASX 200 shares to sell today
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• Not keen on Westpac? Then buy these top ASX dividend shares instead
• Can the Wesfarmers share price continue to rise after its market update today?

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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