I wrote a piece titled...

"Financials mash-up: who do you fancy in a cage fight - Lloyds or Metro Bank?"

...which was uploaded just now to the ShareProphets website.  A link to the piece (free sign-up) is here. 

"Whisper it quietly but large listed UK banks are looking interesting for 2016"

I wrote a piece titled "Whisper it quietly but large listed UK banks are looking interesting for 2016" which was uploaded just now to the ShareProphets website.  You can find a link to the piece (free sign-up) here.

Spin-off #2 - Citizens Financial Group

Another spin-off I have written about is Citizens Financial.  Back in July I noted that it was time for me to sell:

'I concluded a couple of months ago that the hope of achieving a 10% ROTCE opened up the potential for a US$27-30 share price.  With this being pushed back the share at c. US$27 feels there or there abouts.

Citizens Financial has been a great spin-off since the IPO but it feels time to tactically say goodbye to the share.  Somewhere at/around that US$24 share price I might feel differently'

I duly sold the share...and it did subsequently fall back...

...and actually after falling below that US$24 level has recovered a bit. The latter occurrence is interesting as late last week - as I noted here - there was some newsflow from the original parent of Citizens Financial, RBS:

$RBS achieve that 5% leverage ratio & post Citizens disposal above this

Yes, Citizens is to be liberated from any ownership overhang from RBS.  Of course this is good news for both.  

I still note however that will the company trading at around book value and the current return on tangible equity improving but still stuck below 7% you need to be a believer.  A liberated management can work wonders...

 ...but I note it is not quite all green traffic lights.

My view: I am not getting the impression that I need to rush back into Citizens Financial.  Good news re the overhang but given the range of interesting banking stocks (HSBC, Barclays...and possibly RBS) I don't feel the need to rush back into Citizens.  I note the technical support building in the US$23s however.  This is one level for believers at prevailing. 

Spin-offs #1: NN Group and Voya

Regular readers will know I am a fan of spin-offs.  Two related postings on this theme inspired by results over the last few days.

Today Benelux financials behemoth ING Groep reported their third quarter results which also means that two recent spin-offs from the company NN Group and Voya also have reported.  My most recent report on these two names from a quarter ago can be found here.  Turning first to NN Group I concluded back then that:

'have made very solid progression since the spin-off and are trading at/around all time highs.  And they are still cheap trading on about x0.8 book for a H1 RoE of 11.8%.  Even giving a 20% discount for the overhang still suggests a theoretical fair value of around Euro33.  With a good dividend yield suggested for the full year NN Group also remains a keeper'

Since that early August write-up the shares have actually fallen back from the US$29s before rallying in recent weeks back to this level.  Of course this represents a continued outperformance against the broader European indices.

So what was said today?  Well basically further progress.  Return on equity edged up further to now a 12% level for the first nine months as cost cutting continued...

...meaning with ING having shed more of their stake, Euro1bn of free cash having been generated in the first 9 months of the year (an annualised 13% free cash flow yield!) and getting on for a 4% dividend yield paid in the last year (plus a slightly larger buyback!) investors are being given income whilst waiting for the overhang to be reduced...down to just over 25% now. 

My Euro33 target noted above actually now appears a little ungenerous given the reduction in the overhang.  At prevailing - at worst - a solid HOLD. 

Voya is a little different however.  Back in August I noted:

'...with the shares trading in the US$45s today...I still see value into the early US$50s at least.  Still a buy even if ING will one day soon exit its remaining c. 20% stake (which actually will be taken once placed positively)' 

And how are the shares today?  Just below US$40...that's a pretty big fall since August.  

Well with a book value in the US$56s - and even applying an overhang discount - still gives a target price in the mid US$50s.  

So what could have gone wrong?  Try outflows for a start in the retirement and...

...investment management areas.  

Of course these outflows are only a modicum of the overall assets under management (e.g. for the retirement assets it is less than 2% of the total) but it does deserve watching.  Even with another 10% discount the stock still has 20% theoretical upside. 

Net net that sounds like a buying opportunity to me. 

Postscript - another reason for a technical miss by Voya in the Q3 financials was mortality as noted here.  Again this feels transitory and should be no impediment to buying the stock. 

Though Retirement and Investment Solutions accounted for 78% of Voya Financial's (VOYA -3.8%) Q3 pretax operating income, it was a 2nd consecutive month of elevated mortality in the Individual Life unit which caused the sizable earnings miss, writes BTIG's Mark Palmer.

The mortality ratio was more than two standard deviations above the expected level - the first time such an unfavorable variance has occurred since 2007, says management. The unit paid 35 claims of more than $1M during the quarter, totaling $65M. One year ago it paid 25 claims of more than $1M totaling $34M.

Even more European numbers (UBS, Royal Dutch Shell, BMW)

Lots and lots of numbers out today.  After my earlier post reviewing occurrences at Weir Group, Imperial Tobacco and Standard Chartered (link here) a few more thoughts.

First UBS.  I tweeted out earlier the observation that:

#UBS: slowdown in flows from Asia but margins sort of ok in WM division. My view: high teens value not at CHF20

In terms of level I derive this from noting the 15%+ target RoE...

...which suggests to me better value below the CHF18 level which is also a level where the company has also exhibited some support:

I also note that even applying the most ultra cautious Swiss National Bank model UBS is currently still at a 12%+ tier one ratio. Relative quality but wait for the right price in my view. 

As for Royal Dutch Shell I wrote up the numbers at length last week (link here) where I concluded it was 'hard not to see value'.  Today the company has published a 'management day' presentation with some further updated thoughts.  A few key slides in my view:

A lot of headlines will be taken by the boost in 'verified synergies' from Shell's combination with BG Group which is clearly a positive for deal rationale...

...especially as new projects coming on stream are moving aggressively into positive net free cash flow generation over the next couple of years: 

The combined LNG franchise is also in my view a real structural positive albeit the scope for some shorter-term price volatility in this space continues.  

Net net holding/buying Royal Dutch Shell or BG (cheaper way given given the discount the stock is trading at as I noted here) still makes sense to me. 

And finally BMW.  I noted on Twitter that: 

#BMW numbers fine in the wider scheme of things. Nice chart re surprising reality of auto sales momentum YTD

Still, as hinted above, the company's 2015 numbers hopes were reiterated.   

In terms of a few notes from the conference call I observed that:

9m revenue record

‘key financials are a result of a high demand for our products and services’

October continued to be a good month

‘business environment is facing many challenges…China…new models offset this’

‘we have changed the strategy in China…slowing prices…have to take care’. New car sales tougher, so more emphasis financing products, aftermarkets, second hand etc.

‘strategically adhere to legal restrictions…compliance guidelines…corporate and legal culture crucial for this’

‘focus always been on the long term’

‘leading provider of individual mobility in the premium sector’

‘pricing fairly stable as new cars are coming in’

‘good volume that should offset the costs...similar development to last year…margin not to improve’ (vs Q3)

‘slight improvement in mix in the third quarter’ – “X” products, 7 series launch in Q4 and beyond.  So far ‘very well received’.  

Generally good comments even if China remains uncertain and the timing of capex has just taken the edge off short-term margins.  The stock has jumped keenly since the sentiment low point towards German autos after the breaking of the VW scandal...

I did buy the stock near the mid Euro70s lows and am in no hurry to sell it.  A quality longer-term operator.  For new capital I would probably wait and see if you get an opportunity in say the Euro80s.

Europe earnings comments today: Weir Group, Imperial Tobacco & Standard Chartered

Another busy earnings day in Europe. I will come back with some thoughts on UBS and BMW later (after I listen to the latter's conference call) and I might even add a comment or three on Glaxo's R&D day (if I understand it) but first some UK names which updated thoughts earlier today.

First Weir Group.  I don't think I have ever reviewed the service supplier to the minerals and energy sector but no surprises that the shares have been whacked over the last year:

Inevitably the law-of-round-numbers adherent to me notes the bouncing of near/around the 1000p share price level... In present the notes I made from the conference call below:

’70 announcements of mining capex cuts YTD…accelerated in September in October’

Mining -

Original equipment – ‘lumpy’, no clear up trend yet

Aftermarket – feel stated weak numbers ‘one-off’ reflecting tough comps/market factors and pleased with cost containment.

Oil/gas –

Noted further declines since last updated the market in July due to oil prices -25% etc.

‘the longer the downturn the quicker the bounceback will be’ – noted Exxon upping Permian Shale bets

Provide FY16 guidance in Feb

Noted slowdown across all divisions but also market leading positions

‘Strong cash generation’, inventory down £30m helping

Q&A –

Pricing pressure – ‘been pricing pressure for the last four years…been able to mitigate that through efficiency drives’

Aftermarket – ‘disappointing Q3 performance’ but noted different geographic splits (Middle East, selected emerging markets better).  ‘Lots of moving parts’.  ‘Pricing (pressure) in the Middle East is nothing like we are seeing in North America’

‘customers are pushing the boundaries about how long before equipment breaks…rise in emergency orders when something goes wrong’

The bottom? – fudged the question: ‘crystal ball gazing’.  Feb when the update is.  Noted many levers on the balance sheet ‘very comfortable with headroom we have got versus our covenants’.  Noted ‘limited visibility’.  

My view here?  You wait.  I still prefer on margin the actual producers be it a BHP Billiton or a Royal Dutch Shell or BP.  Nevertheless I will be all over the numbers in February including the new guidance. 

Moving on, Imperial Tobacco has been a regular feature on these pages (see for example here).  Back in June I noted a top-slice opportunity (I actually switched monies to Philip Morris International where I see better upside at the moment - link here) and an opportunity to rebuild sub a £30 share price (which occurred in September).  Here however we appear to be technically running out of a bit of steam:

Today's announcement was very solid.  As I noted on Twitter:

#ImperialTobacco nos solid today. Fav slide this one showing post 4% div pre acq FCF & 16e div +10% too (15A +10%)

Which is underneath all this is strong pricing (more than offsetting any Iraq/Syria volume issues) which is - of course - a trait across all tobacco stocks:

Looking ahead the key is going to be the development of the US business which was significantly augmented by a very sensible acquisition earlier this year (and which has helped induce much of the YTD share price performance).  If there is one metric to follow over the next year with Imperial Tobacco it is the US market share one in my view: 

Overall thoughts? Prospectively c. x14 forward EV/ebit and a 5% free cash flow yield (4% paid out with a 10% dividend progression).  This is fine for longer term capital but I would not be putting new money in.  That is for a sub £32 share price currently. 

And finally Standard Chartered.  Two announcements here: first the Q3 results...

...and second a much anticipated money raising to rebuild core tier 1 (above that fabled 13% level).

 As I noted on Twitter:

On the #StandardChartered CC. Even though latter column not annualised point clear. 2nd chart: lots low RoE assets

The charts above show what a mess the bank has become a point memorably noted by the still newish CEO:

'pockets of excellence buried under piles of..."fertiliser" ' - Standard Chartered CEO on what he has found in his first 5 months on the job

So what to think about the money raising?  Well the first aspect to note was that the rhetoric (as noted by the comment above) is suitably aware of the problems the bank is in:

‘thorough root-and-branch review…no sacred cows’

‘developed a very comprehensive set of actions’

‘package aggressive and realistic’

‘our starting point is far from where we would like to be'

Good therefore to see hopes that costs will be materially cut...

...and that RoE recovers over the rest of the decade.  8-10% RoE is not particularly exciting compared to other banks I have looked at over this results season I note.  

Interesting too to note why the RoE has declined so much: blame regulation and cyclical issues!

So should you support this deal?  I think you do.  At a current c. x0.6 price to book value (link here) there is value in simplification albeit you need faith in management to impose the plan and hope that extra regulation costs are not too onerous (plus some outstanding money laundering court cases - see here).  The shares have been dire over the last year including a fall below 650p today...

...and as I was foolish enough to still hold some shares (not a top 20 position) I will be looking to augment and lower my average purchase price. 

Establishing levels for Visa and Church & Dwight

A few US earnings which caught my eye today.

First Visa.  I listed to the conference call and from the comments made on the quarter/FY noted:

Full year constant FX 18% EPS, 16% $ denominated

11% last 2 years constant dollars in payment growth.  Expect uplift next year due to US growth

Second quarter lap easier comparisons

H2 macro cross-border flows important, note some difficulties in H1

Low end of mid-teens range EPS 16e – noting tax, FX drag

‘the key underlying drivers to our business remain very healthy’

'we remain as bullish as we always have been on our structural trends’

Which all sounds fine...albeit Visa's high teen EV/ebit rating factors in quite a lot of structural excitement...and (of course) what a performer it has been over the last three years: 

However the main excitement - and maybe why the shares are down 3.5% as I write - is the purchase of Visa Europe.  Remember, they didn't own this part of their network as per a recent story in The Financial Times:

 Visa Inc is days away from buying its European sister company in a $22 billion deal that will provide a multibillion-dollar payday for some of the UK’s largest banks.

Speculation grew last night that the California-based credit card and payments company could announce the takeover next Monday alongside its fourth-quarter results, normally published in late October.

The buyout of Visa Europe has been expected for several months and Barclays, the company’s biggest shareholder, is expected to make more than £1 billion from the deal, while Lloyds Banking Group and Royal Bank of Scotland will receive smaller sums.

Another beneficiary of the merger will be the two private equity firms behind the recent flotation of Worldpay, the payments processing company.

Advent International and Bain Capital will receive 90 per cent of the money due to Worldpay for its share in Visa, which is expected to be valued at more than £800 million.

So does the deal stack up?  Here in summary is how I saw it on Twitter:

So.. $V & #VisaEurope: paying 10-11% max of mkt cap for 5% bump in earnings but 20% bump in cards, 12%+ in rev (1/2) 

No surprises $V don't see it accretive until '17 but synergies over time surely high. Even if Europe slower growth, gut feel fine deal (2/2)

Again a few further notes from the conference call fleshes out the deal rationale a little further:

Full integration by 2020, highest savings via technology integration

Want Visa Europe operating margins to be ultimately the same as the rest of the Visa group

X1.5 ND:ebitda post the deal, want to pull back to x1.1-1.5 over time

‘could have used offshore cash to help close this transaction’, sounds as if will use debt offering to fund offering

Don’t want to offset flexibility etc.

‘cross border payment is hugely value added’

Overall I like this deal as it makes perfect sense to me and I believe could add a lot of value over time for Visa shareholders.  Visa shares below US$70 (currently US$74s) would still be a full old rating but that is a round numbers level that my pension fund could well be interested in this strong franchise business.  That's my flag level. 

I also reviewed a stock I have not appraised on Financial Orbit before: Church & Dwight:

Listening to $CHD conf call...and learning far too much about 'premium cat litter'. Impressive co...& valuation!

The reason I say an impressive company is derived from pacing through their 'Back to school' conference presentation of the early autumn where they fleshed out some of the positioning and impact of the consumer brand names noted above.  For example: 

Again, another impressive returns compounder over time as shown by the multi-year chart:

The value investor in me of course wants a compelling value entry point.  If I screw my eyes up and roll the numbers forward a year or so the EV/ebit falls below x16 at around a US$80 share price - as shown above a level where perhaps there has been some technical support during 2015.  That's my flag level. 

Two interesting thematic/structural stocks...and two flag levels.  

Thoughts on some US earnings out today (Exxon, Chevron, Moody's)

Whilst it may not quite have been the flood of numbers seen on Wednesday and Thursday this week, Friday had some insightful earnings pronouncements.

In the large cap oil space, both Exxon and Chevron reported today.  I reviewed both stocks a quarter ago (link here) and since this point both have been locked together in share price terms (although Chevron offers the higher dividend yield):

Turning first to Exxon the inevitable first analytical stop is the sustainability of the dividend.  As I noted earlier on Twitter: 

No huge love for $XOM this morning despite the dividend coverage almost there. I still see value in the sector

Exxon's 3.5% dividend yield (and additional buyback) at current levels of cash flow generation is fairly safe.  

Otherwise the Exxon earnings were decidedly as expected: total year-on-year earnings went down due to the upstream division whilst downstream earnings went up a little.  

In the link above I noted more excitement three months ago in Chevron - and this remains the case today.  I found this macro-level oil market insight suitably provocative: 

'We are confident of a recovery in prices...just uncertain on the timing' $CVX

Elsewhere in the presentation the now obligatory sources and uses of cash slide shows an akin profile to the other large cap oil names i.e. there or thereabouts in terms of uses of cash (capex/dividends/buybacks) being covered by underlying cash flows and divestments.  With net debt less than one times ebitda I would still rate the current distributions (including a 4.9% dividend yield) as short-term sustainable.  

One of the more interesting charts in their presentation deck was this growth profile chart.  At the moment - in an epoch of falling capex and oil price concerns - little attention is paid to growth but like it or not depletion occurs and it was actually quite pleasant to see this sort of chart.  

Overall, is there value in Chevron shares?  Yes.  I am not surprised to see them up today and anticipate a US$100+ share price sooner rather than later. 

A final few thoughts.  I did a big piece on the rating agency Moody's a little over a year ago (link here) and observed a good business...but a valuation I could not get quite to work.  Today's quarterly update from the company (even when the FX factors are ironed out) indicated a dullness that smacks of tough comps: 

Perhaps then not too surprising that the shares have gone to sleep in the last year since I looked at the stock: 

I also note a nibbling down of certain aspects of the outlook statement (not for both Moody's Investor Services and Moody's Analytics for their non-US business interests) even though the broader numbers were reaffirmed.  

Still you are paid to wait (5% free cash flow yield) and at a current x14 EV/ebit prospective rating it is not super expensive.  Nevertheless am I very excited?  Not really.  I will keep it on my watch list but prefer to see the stock near its current 52 week low for another re-review.