US expansion

A bright spot

Likely the Last Hike for a While: FOMC Meeting Insights

Key Corporate Earnings Reports: US Bank Stress Test, Associated British Foods, Carnival Cruise Lines, Walgreens Boots Alliance, Nike

Michael Hewson Michael Hewson 26.06.2023 07:56
US bank stress test results – 28/06 –  these stress tests couldn't be timelier given the meltdown in the US regional banking sector in March. In February the US central bank released its criteria which included a severe recession with stress in commercial and residential real estate markets, as well as corporate debt. One of the main criticisms of these tests was a lack of a scenario that factored in a sharp rise in interest rates which brought down Silicon Valley Bank as well as First Republic. Furthermore, US regional banks were not covered under the stress test scenario as they were considered too small and not systemically important enough. As recent experience in Europe has taught us and particularly in Spain where a large cohort of Spanish Cajas nearly brought the economy to its knees and resulted in a banking bailout, just because a bank is small doesn't mean it won't cause a financial meltdown if its troubles spread. The problems in US regional banks were well known at the time, however, there appears to have been a serial underestimation of the risks that a sharp rise in rates would have on some of the smaller parts of the US banking sector, none of which are covered by this week's stress test results.           Associated British Foods Q3 23 – 26/06 –  the recovery in the Associated British Foods share price since the 10-year lows posted back in October appears to have ground to a halt after hitting 15-month highs back in April, just before the release of its H1 results. H1 group revenues rose by 21% to £9.56bn, while adjusted profit before tax came in at £667m. sales across all ABF businesses were higher from the previous year, partly due to higher prices, while its Primark business which has seen an expansion in the US performing particularly well. The company is also hoping to expand its new UK click and collect scheme. On the various businesses Primark sales rose 19% to £4.23bn while margins came in at 8.3%. The various food businesses saw revenues rise to £5.33bn, a rise of 23%, with the ingredients business posting strong profit growth. On the outlook management warned that input costs are a priority, even as some have started to reduce, saying they expect adjusted operating profit in the food business to be ahead of last year. With respect to the Primark business management expressed concern about consumer spending holding up in the face of rising interest rates, and the higher cost of living. H2 margin is still expected to in line with H1 at 8.3%, while adjusted operating profit for the year is expected to be in line with last year.   Carnival Cruise Lines Q2 23 – 26/06 –  the travel and leisure sector has been one of the hardest hit from the Covid shutdowns, and the journey back for the cruise ship sector has taken longer than most, with the industry still struggling to turn a profit even as revenues start to return to pre-Covid levels. For Carnival the journey has been a long one given that in the first year of lockdowns annual revenues fell from $20.8bn in 2019 to a mere $1.9bn in 2021, with the industry undergoing a near death experience. Last year the company managed to turnover $12.17bn in revenue with management optimistic that the new fiscal year would see a return to normal for the first time in 4 years. In Q1 the company said that revenues came in at $4.43bn as losses narrowed to $690m, against a forecast of -$759.7m. On the outlook management said that cruises are well booked for the remainder of the year at higher prices, however, the higher cost of fuel and other costs is acting as a headwind. On annual EBITDA Carnival says it expects to see a figure of around $4bn, which includes a $500m impact from higher fuel prices. For Q2 revenues are expected to come in at $4.75bn while losses are expected to come in at -$0.35c a share. Annual revenues are expected to exceed pre-Covid levels this year. On the downside while total operating expenses are only forecast to rise modestly from $12.9bn to $13.8bn, interest expenses have surged from $206m in 2019 to over $2bn.        Walgreens Boots Alliance Q3 23 – 27/06 –  Walgreens share price has performed poorly year to date, the shares down over 10%. When the company reported in Q2 revenues slid by 3% to $34.9bn, although profits came in above expectations at $1.16c a share. In Q1 the company also posted profits of $1.16c a share, however this was wiped out by a $5.2bn provision in relation to litigation the company was required to pay for opioid related litigation after several US states alleged the retailer mishandled prescriptions by overprescribing. Walgreens has found that its business has suffered through a decline in footfall since the pandemic a situation that it has struggled to adapt to. It has invested into the provision of primary health care, paying $3.5bn towards the acquisition of Summit Health, by VillageMD, putting it near the top of the pack in primary care provision. Walgreens reaffirmed its full year earnings forecast of mid $4.55c a share. Q3 profits are expected to come in at $1.08c a share on revenues of $34.15bn.        Nike Q4 23 – 29/06 –  back in February Nike shares hit their highest levels in 10 months, but have slipped back since then, despite a significant pick-up in their Greater China business. When they reported in Q3, revenues came in at $12.39bn well above forecasts, however a bigger than expected build up in inventory served to drag on its margins which fell more than forecast to 43.3%. Inventory levels were 16% above the levels they were last year at $8.9bn, while their forecasts for Q4 were also relatively conservative, with an expectation of flat to low single digit revenue growth. Given the lacklustre nature of recent Chinese consumer spending even these forecasts could miss expectations, while Nike sales may have also taken a hit due to recent publicity over its new brand ambassador Dylan Mulvaney, and the company's recent advertising campaign. Q4 revenues are expected to come in at $12.57bn pushing annual revenues to a record $50.9bn, with direct to consumer expected to rise to $21bn. Annual gross margins are expected to slip back to 43.5%. Q4 profits are expected to come in at $0.66c a share.   
A Bright Spot Amidst Economic Challenges

A Bright Spot Amidst Economic Challenges

Ipek Ozkardeskaya Ipek Ozkardeskaya 25.09.2023 11:05
A bright spot If there is one bright spot in Britain with all this, it is the FTSE100. First, the rising energy prices are good for the energy-rich FTSE100. Second, softer sterling makes these companies more affordable for international investors, who should of course think of hedging their sterling exposure, and third, more than 80% of the FTSE100 companies' revenues come from oversees, which means that when they convert their shiny dollar revenues back to a morose sterling, well, they can't really complain with a stronger dollar. Consequently, if a more dovish BoE is bad for sterling, the combination of a hawkish Fed and a dovish BoE and a pitiless OPEC is certainly good for the FTSE100. The index has been left behind the S&P500 this year, as the tech rally is what propelled the American index to the skies, but that technology wind is now turning direction. The FTSE 100 broke its February to September downtrending trend to the upside and is fundamentally and technically poised to gain further positive traction, whereas, the S&P500 is heaving a rough month, with technology stocks set for their worse performance this year, under the pressure of rising US yields, which make their valuations look even more expensive.   Interestingly, the US 2-year yield peaked at 5.20% after the Fed's hawkish pause this week and is back headed toward the 5% mark, but the gap between the US 2-year yield and the top range of the Fed funds rate is around 40bp, which is a big gap, and even if the Fed decided not to hike rates, this gap should narrow, in theory. If it does not, it means that bond traders are betting against the Fed's hawkishness and think that the melting savings, the loosening jobs market, tightening bank lending conditions and strikes, and restart of student loan repayments and a potential government shutdown could prevent that last rate hike to happen before this year ends. And indeed, activity on Fed funds futures gives more than 70% chance for a third pause at the FOMC's November meeting, and Goldman Sachs now sees the US expansion slow to 1.3% from 3.1% printed in the Q3. KPMG also warned that a prolonged auto stoppage may precipitate contraction. And if no deal is inked by noon today, the strikes will get worse.   One's bad fortune is another's good fortune  The Japanese auto exports surged big this year, they were 50% higher in yen terms. The yen is certrainly not doing well, but yes, you can't have it all. That cheap yen is one of the reasons why the Japanese export so well outside their country. And in case you missed, the BoJ did nothing today to exit their hyper-ultra-loose monetary policy. They didn't even give a hint of normalization, meaning that the yen will hardly strengthen from the actual levels. In the meantime, Toyota, Mitsubishi and Honda shares are having a stellar year, and the US strikes will only help them do better. 

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