Thursday, 30 July 2015

Favourite charts out of the Continental Europe earnings frenzy: Air Liquide, Siemens, Renault, Nokia

A few charts of particular note out of Europe's Q2 earnings frenzy today.

I have long regarded Air Liquide as your 'if you need to own an industrial Continental European listed stock then this is the one' name.  Today's numbers did nothing to change my mind.  Solid.


If you were going to pick a level?  Below Euro110 to buy some (more).  Yes, not cheap at teens EV/ebit, 2%/change yield but quality.  


Of course a company like Siemens gets a lot more press but I just don't get the same amount of turnaround enthusiasm that I do from a global peer like General Electric (link here). I ranked today's statement as being a bit downbeat to be honest: 


By far the most interesting aspect was the differentiation in their eyes of the Americas with other parts of the world - a not dis-similar observation that we saw Caterpillar make a week or so ago (link here). 

I am short Siemens and happy to add to this position above Euro100 as it provides good cover for other positioning.  


Renault are one of the bigger losers in the markets today.  A difficult company to value given the cross-stakes in Nissan but what I found striking was that European orders when split between their eponymous Renault brand and their cheaper cousin Dacia is clearly showing some favour towards the latter - sign of the times in Europe...

Finally I like the networking theme as noted with my write-ups on Ericsson and their numbers recently (link here).  Nokia showed good margin progress and, of course, the real optionality remains with the merger with Alcatel Lucent (who also produced solid numbers today).  

At the time of the Alcatel deal announcement I did some analysis (not published on Financial Orbit) suggesting that cost cutting/synergies would open up the potential of a Euro7+ share price.  That remains my view and I remain long: 


RBS - progress is being made slowly

RBS is not exactly an uncontroversial UK company but it has been a portfolio friend to me over time having first got active near 300p 18 months odd ago with a target of around 400p the shares have, over the last year, got increasingly volatile and do currently look capped at any price around the aforementioned 400p level.


Today's numbers inevitably will be written up by the broader media with a focus on the 'attributable profit' but to me the progression on the cost and capital aspects of the business are probably more important.

With the company's shares in the mid 350s now they are trading around x.0.9 tangible book which is good value if you perceive the overall group is generating 11% RoE...of course this is 'adjusted'.  But the scope for a 400p+ share price is still there IF the turnaround plan is successfully applied.  


In terms of progress on this front it is reasonable.  Management opined they perceive they are 'ahead of plan'.  


Of course risks remain high - as a quick look at the provisions update noted:

On balance however I still see scope for a 400p plus share price.  Progress is being made slowly. 

A few macro thoughts...

A few macro thoughts today...(a bit brief as so many companies out which is really my focus today): 

Greece – delays, delays: Parliament’s Budget Office warned on Wednesday that the government tactics of the last six months have led the economy back to recession, with weekly losses of 2.8 billion euros in gross domestic product as long as the capital controls apply (link here).  

Meanwhile an Athens stock exchange spokesperson said that – despite rumours yesterday – the market unlikely to open this week…

Greece #2 - Tsipras Seeks to Avert Party Split as Greece’s Creditors Arrive for Talks (link here). 

FOMC thoughts - FED: RATE TO RISE AFTER `SOME FURTHER' JOB MARKET IMPROVEMENT. " Some" = "not a lot"? So September still on, assuming decent employment reports Jul/Aug would be a consensus view…however I would highlight interest rates levels so much lower than normal at this stage of an economic recovery. Still cautious though about further material US dollar strength...

China – volume has halved since June highs, whilst the overall Shanghai Composite flicking either side of zero today.  A relatively quiet day (for once)...until a big fall into the close.  The below surely appropriate! 


(h/t @RANsquawk)

Brazil - Brazilian Central Bank Hikes SELIC Rate 50 bps To 14.25% As Expected...hasn't helped the currency YTD as shown below.  




Still in terms of where there is growth in the world...it is not in the developed world: 


Wednesday, 29 July 2015

Financial Orbit wrap 29/07/15

Five sentences or graphics which sum up the Financial Orbit output over the last 24 hours across the website, twitter account and anything else thought about...

1. A huge company earnings day...so huge I barely had time for any macro thoughts.  No real problem...

Started the day at Share Radio talking through the plethora of UK RNS statements. You can listen in to some of the thoughts here.


2. Posted some thoughts specifically on Sky and BATS from the UK results frenzy...


3. ...and then of course Barclays where I still see the scope for a 300p+ share price


4. Then onto US numbers. First Gilead whose after hours Tuesday numbers impressed me so much (link here): 


5. And then some thoughts on Altria, Goodyear and Eaton Corp (link here).  


And it carries on after hours with Wynn Resorts, Facebook and Whole Foods amongst others.  

A huge US earnings day - some thoughts on Altria, Goodyear and Eaton

A huge US earnings last 24 hours...and much, much more to follow.  So a few edited highlights from my perspective.

Got to start with Altria given I bought back into the share a little over a month ago (link here)...and what a good last month or so it has been:


So what observations did they make today? Well an upgrade to EPS hopes and an enhanced buyback kind of helps...


...and throw in good market share at their key Marlboro brand too (which no doubt helped contribute to the above).

So - frankly - new highs seem more than reasonable - but actually the shares are down today.  Such are the fickle nature of 'buy on the rumour, sell on the fact markets'. Maybe in the US$58s I dust down the numbers again.  And if the shares fall back below US$50 then I am going to buy more.  Super solid - and a nice near 4% yield too. 

Goodyear next - after concluding that I await a lower price for their European listed peer Michelin yesterday (link here). Well the numbers review don't start off that well with patchy price-mix and inflation largely offsetting cost savings.  Fortunately lower raw material prices (thanks the oil/related price!) contributed positively...

...and actually looking at the raw material / price/mix shift over time...it has been regularly net favourable to the company.  In essence a pretty good job from the Goodyear management.  


And then there is cash flow.  I talked yesterday about the important signalling of a 5% free cash flow yield, so how does the below rank up?  Well US$1.1bn is something closer to a 14% FCF yield...useful when formal debt is x2 ebitda (and there are pension obligations on top of this). 


So at just below x7 EV/ebit the shares don't feel too expensive...even if they are nearer the top rather than the bottom of the recent trading range (slightly unclear from the chart below but they currently trade in the US$29s).  My instinct: quite interesting despite the debt 



And finally Eaton which I have never covered here on Financial Orbit.  So why look at it (briefly) now?  We will come to that in a second...but in the interim what do they do?

Eaton Corporation plc operates as a power management company worldwide. Its Electrical Products segment offers electrical components, industrial components, residential products, wiring devices, and structural support systems, as well as single phase power quality, emergency lighting, fire detection, circuit protection, and lighting products.

So industrial and construction related products.  Certainly cyclical and international.  Here is the interesting graphic from their presentation which struck me: 


Fascinating evolution over time!  Organic growth worsening, corporate expenses lower but nevertheless despite this and lower capex still net lower free cash than hoped for at the start of the year. Oh and a tweak down in EPS in July just for good measure. A great insight into globally focused listed US stocks. Nevertheless it does have the cash flow (5.4% equivalent to EV at the prevailing share price) but also debt at a cool x3 ebitda...

Still trading near one year lows equates into an interesting chart.  I get the impression that if the US dollar turns then this one will as well...but necessarily a bit higher risk. 


Who said there are no interesting US stocks to look at?!

Gilead - impressive after hours earnings numbers yesterday, at worst a strong hold

A little over four months ago I established a US$90-110 range for the US biotechnology company Gilead (link here) since when the stock has not breached the lower bound but in the last couple of months has risen above the upper level.


Undoubtedly this performance has been helped by a general 'enthusiasm' for the sector which has manifested itself in some high sector valuations - although not on a relative basis by Gilead.  


So long story short I let my position run ahead of yesterday's (Tuesday's) after hours update...and what an update it was.  Of course the chart which got my immediate attention was the guidance one: 


So let's get this right: on a mid-point basis higher sales, higher margins and lower taxes...that sounds like a positive combination and worth a 5%+ upgrade.  

However the most impressive part of the numbers was the underlying quality. On the conference call the greatest focus was on the HCV rather than the HIV division (an interesting evolution over the last couple of years) and in the former space not only were new product launches hugely net sales generative...

...but further sales extensions are apparent as the international roll-out of the Harvoni product increases apace: 


HIV treatment share remains very high...


...and growth potential (unfortunately) also is still clearly apparent: 

With the company also confirming that there is very limited likelihood of a large material acquisition the continued extension of recently initiated dividend and buyback strategies remains the most likely scenario which - given the low relative rating and growth potential - feels only value adding to the share.  

Given some of the vagaries around the biotechnology space on purpose I was a little ungenerous in my valuation targets during my note of around four months ago linked above.  Given progression in both the numbers and the story pushing through a 10% upgrade to my top of the range level to c. US$125 does not feel particularly aggressive, making at worst Gilead a strong 'hold'.

 An impressive conference call update.

Barclays: the grind to 300p+

After the excitable management change at Barclays of a few weeks ago (link here) now some numbers to play with...and comments too.  Listening to the conference call I like the ongoing noises around simplification, a stronger balance sheet (organically) and establishing a 'credible agenda' for all interest groups which they can execute on.

I talked at the link above about a fundamental value for Barclays shares of closer to 300p and I stick with this given the core bank return on tangible equity in excess of 13%...


...and a tangible NAV of just under 280p even applying a discount for the continued wind-down of the non-core bank.  
Ok the interim dividend was not raised but the push back on some earlier in the week comments in the press about the potential need for a money raising were pushed back and I note sensible progress on costs ('positive jaws') and 2016 costs/capital targets remain in place.  There was some chat, however, of higher provisioning costs in H2 versus H1.  No disaster overall.

So I remain a holder in hope of 300p+ a share - certainly my instinct is not to even considering to sell any shares until at least there is a '3' in front of it.


Barclays is not out of the woods at all but with a combination of growth scope at Barclaycard and its African operations, simplification assisting the utility-like retail banking division and focus assisting the investment bank there are angles still for shareholders.  Barclays shares may have generally been grinding up this year but to remain hopeful of a grind past 300p remains a reasonable view.