Stefano Sciacca

Fri, Apr 26

KYLIN TALK | Stock Watch 26.04.19

What we have learnt so far from the earnings season kick off:

The major US banks started the earnings season last 12th of April amid palpable investors’ optimism in view of economic outlook downgrades, deteriorating soft data and companies lowering their 2019 year guidance with conservative numbers. What we have been seeing so far is a blend of mixed earnings, where amongst the top 30 beat rates we find “big” names such as Philip Morris, PayPal, United Technology, Twitter and Hasbro. Currently, c. 70% of the companies listed in the S&P have reported a positive EPS surprise, while more than half have posted a beat on revenue.

Sector-wise, Services (+6.6%), Industrials (+6.5%), Financials (+5.6%), Technology (+5.6%) and Consumers (+5%) came out as the top performing sectors in the S&P 500 while Healthcare (+4.2%) has been the weakest. On the other hand, as per last week, Information Technology, Healthcare, Communication Services and Materials sectors had the highest percentage of companies reporting earnings above estimates.

The overall picture shows the S&P 500 edging higher (see “Chart of the week” below) and an improving earnings outlook (see the charts below) that might push analyst estimates upward for the full-year 2019. On the other side of the coin, the 12-month forward Price to Earnings ratio for the index is close to 17x (vs 5 years average at 16.4x and 10 years average at 14.7x), suggesting valuation is still quite high compared to history (see chart below).

Hot Topics:

Boeing finds much needed support from the Pentagon as the plane maker won a $14.3bn contract with the Air Force. The job includes modification, modernization, engineering and testing of weapons systems for the B-1 and B-52 bombers. The contract is expected to be fully executed by 2029. The company reported already-expected negative results followed by FY 2019 guidance pull-back. Nevertheless, although bulls and bears already factored in the weaker quarter, Q1 results highlighted a company with strong fundamentals and with no liquidity crisis concern.

 Facebook’s year-to-date rally seems to never stop as the company continues to grow at an extraordinary pace of 30% yoy on constant currency revenue. The impressive results are marked by a jump in Mobile ad revenue (+93%), while costs have been negatively impacted by legal expenses. The social media company has a daily active user base that is circa20% of the planet population, however, the Quarter 1 growth shows consistent results across every region excluding US, where daily active users base has now been stable for several quarters. The growth in costumers is impressive considering the recent security and privacy issues following the Cambridge Analytica scandal.

Facebook gained more than 30% YTD and it is currently trading at a 12-month forward Price to earnings ratio of 23x (vs Google/Amazon/Apple/Twitter at 28x/91x/17x/22x).

Last week has been the week of Disney launching the new Disney+ streaming service for the cheap price of only $6.99 per month. Markets have embraced very positively the new platform that offers great quality content such as Pixar, Marvel, Lucasfilm, National Geographic and 20th Century Fox. The announcement follows Apple TV Plus launch making the streaming services competition as fierce as never before. Netflix is the provider that is being impacted the most. Their earnings release looked promising and showed consistent revenue (+22%) and subscribers (+25%) growth, beating analysts’ expectations on both metrics. Albeit the strong momentum, management guided for a very conservative outlook suggesting 8% decline quarter on quarter of new subscriptions going forward. Netflix valuation now looks expensive, considering that analysts expect the streaming services company to break-even with 180mn subscribers (now at 149mn), reaching annual revenue of about $21bn. If we divided the current valuation of $155bn with the sales needed to become profitable we would get a multiple of 7x (vs current multiple at 10x).

Tesla missed on both earnings per share (EPS) and revenue targets due to lower demand of Model S and X. The electric vehicle manufacturer said it delivered 12,100 S and X vehicles in Q1 and they reiterated their bullish full-year guidance of 360,000-400,000 vehicles. The company also mentioned in the earnings press release it could potentially hit 500,000 deliveries by year-end in case the Gigafactory in Shanghai starts to produce. The Chinese plant is expected to be almost fully funded by local debt plus $2-$2.5bn of CAPEX already anticipated throughout the fiscal year and to reach its full capacity by end of 2019. Furthermore, electric vehicles produced in that plant would cost as much as 50% less per unit compared to the other US-based manufacturing facilities. On the negative side, April has been a terrible month for deliveries in Norway and Netherlands, some of the most-eco-friendly countries globally and strongest EV buyers in the world. Compared to March, the daily sales rate in Norway and Netherlands has fallen by more than 80% and 70%, respectively. Battery-electric vehicles represent 58% of sales in Norway due to much lower taxes. In this way, the Nordic country currently own the highest share of electric cars sold in the world.


Next week our macro spotlight will be on?


• Economic Sentiment Indicator & Business Climate Indicator April 2019 – Eurozone
• Second release quarterly sectoral accounts: Households Q4/2018 – Eurozone
• Economic review: April 2019 – UK
• Personal Income and Outlays, March 2019 – US


• Preliminary flash estimate GDP - euro area and EU Q1/2019
• Unemployment March 2019 - Eurozone


• Gross Domestic Product by State, 4th quarter 2018 and annual 2018 - US


• Flash estimate inflation euro area April 2019 - Eurozone
• Industrial producer prices, domestic market March 2019 – Eurozone
• UK productivity analysis: May 2019


Chart of the Week


Fact of the Week

Disney guides the newly launched streaming service Disney+ to reach 60-90 million subscribers by fiscal year 2024 (2/3 international and 1/3 domestic), while Netflix could lose as much as 15% of its current US user base only next year.


Quote of the Week

“To share one example, a local e-commerce jewellery brand called Lokai started donating 10% of their net profits to charitable partners. And they started running video ads in Facebook Stories and News Feed. And just the addition of Facebook Stories drove 26% more additions to their checkout cart”

Sheryl Sandberg, Facebook COO, on Facebook Stories value added for Online businesses marketing.