Tuesday, 27 October 2015

Tuesday earnings season wrap - Europe (BP, BASF, Novartis)

A big earnings day to say the least.  First stop for a wrap/review is Europe where four corporate earnings catch my attention.

I have covered BP already today here and listening to the conference and leafing through the presentation document I got akin feelings.  The three key charts from the presentation were clearly the ones below given (as I noted in my linked article above the importance of the sustainability of the dividend and not trading off on the growth potential of the company.

On the dividend as noted below the company despite ongoing cost control efforts is not yet covering its use of cash flow obligations...

...and hence is going to be dependent on a few billion dollars worth more of disposals to keep gearing below 20%.  Not a high statistic in absolute terms but an important one for the company to keep close to.  I think they do and the dividend keeps flowing.  

As for the growth potential trade-off...well even though I do not expect material growth from the company the below graphic notes continuing construction and design level potential.  US$15bn pa capex should buy you something other than field maintenance...

My view is as noted at the above link: BP shares should move neatly into the 400s during the next year.  Of course inherent within this is a call that oil prices are not going to dump materially further - as mentioned in the earlier piece the usual impact of the oil majors cutting capex materially is for the supply/demand dynamic to naturally get tighter.  

Staying with oil related stocks, numbers from chemical giant BASF were notable for their pulled back guidance ('ebit before special items is expected to be slightly below the level of 2014') and from their in-house economics team's pulling back of industrial production and oil price assumptions. 

Ah...the oil price.  Typically for a chemicals company a lower oil price hurts pricing efforts and this was certainly the case with these Q3 BASF numbers with only the agricultural sector (noted above as struggling at the earnings line): 

Other notable factors?  Good free cash flow...although note the big working capital swing (any recovery and watch that reverse).  

The shares clearly have some technical support at c. Euro65 and fundamentally I note achieving Euro8bn of ebit (FY14A came in just below this level as will apparently FY15e) and valuing this at x8 EV/ebit would suggest just below a Euro70 level is of interest.  Net net with a near 4% yield and fundamentally sensible positioning (including inevitably some euro correlation) sub Euro70 BASF shares would flash as 'interesting' (with augmentation levels each Euro5 down).  

As for Novartis I have talked about the Swiss healthcare name as being safe/steady but just a bit 
expensive.  That remains the case despite the share coming off the highs of three months ago:

Fundamentally there is no fire at Novartis despite the eyewear Alcon unit struggling.  Pricing and generic challenges were countered by core product growth in both the pharmaceutical and generics units and debt - despite heightened by the GlaxoSmithKline asset swap - remains relatively modest.  

Back in July - at around CHF100 a share - I was a seller but here at around CHF90 I am more of a holder.  Not overly inspired though - at prevailing give me their Swiss peer Roche any day.  

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