Company results in the limelight

Análisis de mercado - 28/07/2017

Earnings results and the US dollar’s fall against the euro held centre stage this week. (English version)

On Thursday, companies with a combined $3 trillion in market cap reported results, the busiest day in the last 20 years.

In the US, more than half of companies reported an aggregate 9.6% increase in earnings and a 5.5% rise in sales. Tech led with an 18% jump followed by property (+12%), notably in the industrial and commercial fields. The Fed recognised on Thursday that inflation was rising at a slower pace and the US dollar weakened further, moving above 1.17 to the euro. The Fed also said it would relatively quickly be in a position to slow reinvestments of proceeds from bond redemptions.

In Europe, with 40% of Stoxx 600 company results in, 54% have beaten expectations and quarterly earnings are up 14% on average. The strongest growth was in energy (+80%), telecoms (+71%) and financials (+67%).

Last Monday’s eurozone PMI struggled to accelerate but remained at high levels, notably as concerned new orders and job creations. In France, the government’s reforms might be facilitated by:

- the upbeat economic picture,

- July's improvement in the business climate and

- second quarter growth which came in at 1.8% YoY.

In China, the pace of industrial profit growth picked up in June to 19.1% YoY, boosted by the iron ore and commodity sectors. This means Beijing is managing to maintain growth (second quarter GDP rose 6.9%) ahead of the Communist Party Congress in the autumn, a situation which is providing support for the global recovery.      

Our asset allocation views are unchanged. We still prefer equities and are overweight Europe. As for fixed income, yields have risen recently but are still historically low due to inflation lagging global economic growth. In our view, monetary policy normalisation, whether through interest rates in the US or the slowing of asset purchases in Europe, still represents a risk should long rates rise in coming months.

  European equities

The week was dominated by a crop of quarterly earnings reports. The Fed meeting held no surprises and the euro continued to gain ground against the US dollar. July’s eurozone PMI readings fell to 55.8 vs. 56.3 in June but the IFO index improved to 116 or above expectations of 114.9 while business confidence in France hit a high not seen since 2010. With a little more than half of Stoxx 600 company results in, the most positive surprises have come from sales growth among tech and telecom stocks while industrials and utilities have fallen short.

Luxury stood out among strong performers with Swatch’s results reflecting an upturn in China and signs of encouraging trends for the second half. LVMH, Kering and Moncler continued to deliver double-digit, like-for-like growth while maintaining margins. In telecoms, revenues at Orange and KPN beat estimates and Telefonica raised its like-for-like growth outlook. Nokia had a good quarter in its technology segment but the prospects in its network businesses dimmed. Philips reported mixed results but the new orders trend was upbeat. Akzo Nobel missed expectations and ADP suffered from soft sales in its retail division. Airbus reported a disappointing EBIT margin and was hit by the US dollar’s fall. Nestlé, Lindt, L’Oréal and Danone all posted disappointing growth rates.

The autos sector was hit by news that German companies had formed a cartel to fix diesel emission equipment prices. BMW denied it had colluded with rivals. At the same time, Peugeot unveiled record first half results and excellent margins in its car division while Renault only managed stable car division margins and thus disappointed investors. Astra Zeneca tumbled 15% on a big cancer drug trial setback, dragging the entire sector down.  

In M&A, Ceconomy paid €452m for the 24% in Fnac Darty held by Artémis.

  US equities

Indices were more or less unchanged over the week but this apparent stability masked a strong surge in telecoms and consumer staples and a heavy fall in healthcare stocks. Telecoms gained on much better quarterly results than expected and giants Verizon and AT&T jumped 5% and 7% respectively. Note, however, that both had been seriously underperforming since the beginning of 2017 so this represents only the beginning of a catch-up.

In macroeconomic data, the most notable figure came from durable goods orders which jumped 6.5% in June or much more than the +3.9% expected.

In political news, Donald Trump left the reappointment of Janet Yellen in doubt by referring to former Goldman Sachs banker Gary Cohn as a possible replacement when Yellen’s mandate runs out.

The US earnings season is overall encouraging but market reactions have been mixed due to very high expectations. This was especially the case in tech which might explain why Google and Amazon both fell even after reporting very strong figures.

  Japanese equities

The TOPIX edged down 0.2% over the week. It was weak in the first half of the week before rebounding from Wednesday on the robust US market. Buying slightly exceeded selling on Thursday as hopes for brisk corporate earnings spread despite the yen’s rise against the dollar and a dip in US long term interest rates after the Fed meeting. However, market participants were prey to increased political uncertainty after the popularity of Shinzo Abe’s government declined. The prime minister is expected to cope with this situation by reshuffling his cabinet shortly.

By sector, the best performers were Nonferrous Metals (+1.8%) and Other Products (+1.0%). Nidec advanced 4.1% after it raised its consolidated sales and profit estimates for FY 2017 ending in March 2018. Nintendo rose 3.4% after it announced operating profits of JPY16.2bn for April-June 2017, a turnaround after the operating loss of JPY5.1billion a year before. Auto-makers such as Matsuda (+4.1%) and Toyota (+2.0%) were also strong.

 In contrast, Pulp & Paper (-3.3%) and Rubber Products (-2.2%) were weak. Kao (-4.3%) and Shiseido (-4.0%) met with selling. Toshiba dropped 3.3% after last week’s strong performance.

  Emerging markets

In India, earnings grew by a modest 5% YoY for the NIFTY companies who have published so far.

Apart from ICICI Bank, private banks like HDFC, Yes and IndusInd reported an upbeat 20% increase in EPS. Consumer plays were hit by soft sales ahead of GST: results were subdued for Asian Paints and Maruti. Hindustan Unilever published a decent 8% rise in earnings in a tough environment. Reliance Industries reported a 28% jump in EPS thanks to strong refining margins.

In China, very few companies have published so far. In the education sector, TAL’s results were better than expected (+82% YoY) and New Oriental also posted very solid figures (+41% YoY). Baidu surprised positively with 98% EPS growth YoY. In the auto space, Great Wall results fell 79% YoY, penalized by lower ASP and higher marketing expenses.

In Korea, the National Assembly passed the FY17 extra budget worth KRW 11trillion (0.6% of GDP) last Saturday. The government plans to use 70% of this in the third quarter. We estimate the extra budget will add 0.2bp to GDP growth in 2017 (2017F GDP growth at 2.7%). Due to a persistently strong memory market, Samsung Electronics nearly doubled earnings (+88%). The favourable DRAM environment also benefited Hynix which multiplied its results YoY by more than 8 times! In sharp contrast, Amore Pacific saw EPS fall 57%.

 In Indonesia, FDI hit a record USD 8.3 bn in the second quarter. Astra International reported modest 7% earnings growth, with the heavy equipment and mining division contributing the most.

In Brazil, the central bank cut interest rates by another 100 bp as expected. Consumer companies surprised on the upside: Lojas Renner reported 6.4% same-store-sales growth helping EPS rise 10%. SSS growth at Pao de Acucar was 6% while operating profit soared 255%. Localiza even reported an impressive 32% in EPS growth despite the tough employment environment.

 In Mexico, infrastructure plays continued to deliver solid performance. Airports GAP, ASUR and OMA reported YoY earnings growth of 86%, 135% and 13% respectively. Pinfra’s bottom line, a 13.8% YoY fall, was misleading as concession business EBITDA increased 33% YoY while financial results worsened. Walmex reported solid 7.2% SSS growth which helped them to more than double their profit (+118%). Next week, most of China’s companies will start to report.

  Commodities

Oil prices enjoyed a vigorous rebound that took Brent crude above $50 to 51 and WTI to 49, a 7% rise over the week. Monday’s OPEC/Non-OPEC meeting in St Petersburg produced a number of surprises:

1/ as rumoured, Saudi Arabia promised to limit exports to 6.6 million b/d from August, a million less than 2016 levels and a drop of about 400,000 b/d compared to current levels.  

2/ the option of further cuts after March 2018 remains open.

3/ Nigeria reportedly agreed to limit its production increase to 1.8 million b/d (vs. today’s 1.6-1.7 million) rather than the targeted 2.2 million.

All these moves are positive as they will reinforce the cartel’s credibility while stabilising the market. However, the slight problem of Libya’s increased output was not addressed by the meeting.

In the US, the DoE said inventories had fallen by a sharp 7.2 million barrels for crude oil and 10 million barrels including oil products. Saudi Arabia’s export cuts should reinforce this downward trend. US drilling has been stable for 3 weeks. Oil services company Halliburton confirmed this by saying that the rig count was apparently stabilising and that its production clients were applying the brake in North American basins. Anadarko said it had reduced CAPEX due to current market conditions, a consequence of recent price weakness and volatility.

Industrial metals also bounced sharply due to upbeat economic data, notably in China, and the weak US dollar. Copper broke above $6,000/t to 6,300, a 2-year high. According to the World Bureau of Metal Statistics, the copper market has been in deficit since the beginning of 2017 and China is thinking about banning imports of category 7 scrap metals, thus increasing demand for refined copper.

  Corporate debt

 

Credit

It was a rather volatile week for government bond yields. They fell at the start of the week when July’s PMI fell to 55.8 but rebounded Wednesday on news that Germany’s business climate index had risen. They tightened further after the latest Fed indications but ended up rising again on Friday. Even so, these fluctuations had little impact on spreads and the iTraxx and Xover ended the period more or less unchanged.

It was a quiet week on the new issues market. Cleaning and hygiene products company Diversey (B/B3) raised €524m with a senior 8-year maturity at 5.625%. AllFunds (Ba2/BB-) raised €575m with senior PIK Toggle 2024 notes at 4.125%.

The earnings season picked up speed with most companies beating estimates. However, Gemalto (BBB estimated) saw preliminary first half sales fall 9%, causing it once again to cut guidance for 2017. Elsewhere, Europcar (B1/B+) reported a 6.6% increase in second quarter sales, or in line with estimates. Cemex (BB- cw pos) undershot expectations but confirmed its forecast for the full year; business slowed in Europe and Latin America but surged in the US. Casino (BB+) saw first half sales rise 9.7% with strong performance in France and Latin America. Vallourec (B neg) saw a sharp increase in second quarter operating results with a 67.6% jump in shipments. The group revised its 2017 EBITDA targets higher. The group is still eating through cash flow and its net debt rose to €1.6bn as of end June. After last week’s disappointing results from Ericsson, markets were reassured by Nokia (Ba1/BB+) as sales only dipped 1%.

Huntsman (Ba3 cw pos/BB- pos) launched the IPO of its subsidiary Venator Materials (B1 pos/B+) and the listing should fetch $454-574.3m. 

Convertibles 

This week saw a jumbo new issue in China from Shanghai International Port which sold a $1bn bond in two tranches (each of $500m with 4 and 5 year maturities), exchangeable into the Postal Savings Bank of China; the proceeds of these premium redemption bonds which have a 0.75% yield will be used for refinancing. In the US, Team Inc, a specialised industrial services provider, came to market with a $200 million 5% 2023 convertible to repay existing term loans.

This week’s news was dominated by the ongoing earning season. In Europe, French defence player, Dassault Aviation, reported solid first half EBIT of €123m or slightly higher than the consensus. The CEO also reassured the market by revealing that the new French Defence Minister wants to develop new projects rather than cutting or postponing. Finnish steelmaker Outokumpu reported in-line second quarter EBITDA of €199m -expectations had been reduced following the recent profit warning- with lower ferrochrome volumes shipped owing to technical issues and lower raw material prices. Of note also was the departure of Elior’s CEO, Philippe Salle, amid a disagreement with the group’s founder and leading shareholder, Robert Zolade.

In the US, medical devices developer, Nuvasive, beat the consensus with second quarter revenues up over 10% YoY to $261m. However, the stock fell over 13% after market when the company said that the COO and CFO were both stepping down. Industrial control semiconductor specialist, Silicon Laboratories, continued to post impressive results with second quarter sales coming in above guidance at $190m (+9% YoY), mainly due to a 11% rise in the IoT business. Management is confident it can maintain this momentum and expand the IoT segment while gaining market share.

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