Stefano Sciacca

Fri, May 24

KYLIN TALK | Stock Watch 24.05.19

Update on the Earnings Season

So far, 449 out of the 500 companies included in the S&P equity index have already released their Q1 earnings update. According to S&P analysts, 74% of them have beat consensus estimates, while the index has thus far showed a 15.5% EPS surprise rate (vs 15.1% for last week). Interestingly, 11 companies have experienced at least 100% YoY growth, while 38.5% have shown double-digit or higher growth.

Sector-wise, Healthcare leads with 9.6% EPS Growth, followed by Real Estate and Financials at 8.5% and 6.1%, respectively (see “Chart of the week” below). Amongst the still missing “big names”, there are NVIDIA and Walmart, with a respective EPS consensus of $0.81 and $1.02. Last week’s main beats on EPS include Electronic Arts (+43%) and Fox Corporation (+13%). For the time being, the US major equity indexes are slightly slowing down, although they are all up double-digit on a YTD basis.


Hot Topics

It was a positive week for stocks as the Trump administration’s ban on Huawei Technologies which does not allow the Chinese smartphone maker to buy US technologies without any special approval and disconnect its equipment from US telecom networks on national security grounds. Chinese stocks, especially Huawei suppliers, tumbled consequently. Huawei, which is the world’s biggest communication equipment manufacturer and the second-largest smartphone maker, might risk Google and other US semiconductor will stop providing components and other solutions in the upcoming years. Market Share will likely decline, along with sales and margins. Who will benefit from the Huawei ban? Samsung Technologies. The Korean technology company’s market share has been negatively affected by Huawei’s expansion especially in the Western countries and might come out as the winner from this issue within the Consumer products (smartphone) space. The chart below highlights few scenarios that might follow the Huawei issue by each segment where the company operates.

The chief economist of Germany’s Ifo institute for Economic Research claimed the car industry will not see a significant recovery from its current slowdown. As-a-consequence, Germany’s business climate indicator, which can be used as proxy to gauge the economic sentiment around Europe, fell harshly in May. The German main car makers have been performing poorly over the last month, with BMW being down more than 15% in the period. Daimler announced a cost-review screening process which involves fixed and variable costs, material and personnel costs, investment in new projects and product range. Nevertheless, the stock plummeted by 7% on Thursday.

The food delivery industry is getting more competitive. Amazon invested as much as $575mn in the private company Deliveroo, which is one the second-largest player in the UK. Deliveroo currently operates in 14 countries and compete against Just Eat and Uber Eats. Just Eat’s share price dropped 9% after last Monday’s announcement from the US tech giant. Amazon will integrate the food delivery service with Alexa, by allowing users to directly order takeaway food on Echo, and maybe take advantage from Deliveroo’s couriers to deliver packages as well as food, or even including Whole Foods Markets already-cooked food within Deliveroo’s products range. Amazon is proven to have an impeccable track record of integrating businesses in an efficient and sustainable manner.

Marks and Spencer, one of the largest UK retailers, profit warned this week. The company reported 10% drop in profits as UK retail industry continues to suffer (Jamie Oliver, notorious English Chef, announced his Italian restaurant chain had gone into administration, putting 1300 jobs at risk). On the same wave, Boots UK also reported a sharp decline in profits (20%), while we already presented House of Frasers and Debenhams case-studies. Luxury brands such as Bentley and Burberry flagged deteriorating outlook albeit Brexit uncertainty and slowing APAC Sales.


Next week our macro spotlight will be on?

*  Economic Sentiment Indicator & Business Climate Indicator May 2019 - Eurozone

*Gross Domestic Product,1st quarter 2019 (second estimate); Corporate Profits, 1st quarter 2019 (preliminary estimate) - US

*  UK economic statistics sector classification update and forward work plan: May 2019 – UK
*  Personal Income and Outlays, April 2019 US


Chart of the Week

Fact of the Week

MARKS & SPENCER has announced plans to close 110 stores, including 85 full stores and 25 Simply Food outlets. The retail giant reported a 9.9 percent fall in underlying pre-tax profits to £523.2 million for the year to March 31


Quote of the Week

“The middle class in China has reached critical mass of over 300 million, almost as large as the entire U.S. population. The middle class will double in the next 10 years, especially from the lesser developed Chinese cities. While total Chinese domestic consumption is USD 5.5 trillion today, consumption from these third-, fourth- and fifth-tier cities with a combined population of 500 million people will triple from USD 2.3 trillion to nearly USD 7 trillion in the next 10 years”
~Chung Tsai, Executive Vice Charmain of Alibaba Group Holding Limited, on the company benefitting from demographic and economic mega trends in China