Don’t shed any Tiers

What to look out for on the European bourses in the week starting 14 February.

European investors have a lot to look out for in the coming week.

In France and the UK, the first big banks will reveal their FY results, with BNP Paribas expected to post higher revenues and profits y/y. The market is also hoping to hear an update on Fortis’ synergy target.

A day earlier, Societe Generale will post its 4Q results.

In the UK, Barclays releases preliminary numbers on Tuesday. Morgan Stanley notes that there is potential for better outturn on provisions at BarCap, as securitisation data indicates a marked improvement. Investors will also look out for comments on Basel III impacts on risk weighted assets, future impairment profile and ways to improve return on equity.

In the Netherlands, ING Groep should have experienced another solid quarter, while its insurance business has been hit by pre-announced charges of EUR 1.0bn to address the recoverability of deferred acquisition costs.

Other insurers are reporting their figures in France and Switzerland, with AXA and Swiss Re.

Italy’s Eni is one of the last oil majors to unveil its results. Consensus points at strong FY numbers.

Food giants Nestle and Danone are also releasing earnings bringing the focus on rising input costs for the sector. Soaring cocoa and grain prices risk gnawing at margins going forward. UBS expects Nestle’s results to be sweet with organic sales growth of 5.5%.

In the UK, mining giants BHP Billiton and Anglo American will both dig out their 1H and FY releases. The market widely expects the results to be similarly shiny as peer Rio Tinto’s recent figures.

Quarterly numbers from Swiss-Swedish industrial giant ABB should not be too much of a surprise, after the engineering company pre-announced results and reiterated its outlook of continued industrial growth supporting its short- and mid-cycle businesses in automation and power.

In France, electrical equipment maker Schneider should also give a confident outlook alongside its 4Q release.

Full year results at Germany’s car and truck-maker Daimler are also on the cards. Consensus view on the stock is positive, largely on account of exposure to the US truck recovery. Recent data also shows strong end markets for premium cars in China as well as Germany and the US.

Away from earnings, the calendar is similarly packed with data releases. Among the many highlights will be preliminary 4Q GDP figures for the eurozone, UK and US retail sales, the UK’s quarterly inflation report, and minutes from the Federal Reserve’s latest rate setting meetings.

Starting in the eurozone, Monday brings industrial production data for December. Consensus looks for a -0.2% reading for the month after a +1.3% rise previously.

China will also publish several sets of figures, including January inflation numbers.

New York Market Commentary – 10 Feb 2011

Today’s New York Pre-Market Commentary I have written for S&P European MarketScope:

New York Market Commentary – original published 10 February 2011, 14:14 GMT

US stock index futures suggest a negative start on Wall Street, as investors are likely to cash in after eight straight days of gains for the Dow index. Heavy losses on European and Asian bourses also weighed on sentiment, offsetting positive surprises from the US’s weekly jobless readings. Initial claims fell much more than expected to 383k from revised 419k w/w, while the figure for continuous benefits claims also decreased to 3.888m from revised 3.935m. Forecasts estimated 410k and 3.900m respectively. December’s wholesale inventories reading (consensus: +0.7% vs -0.2% m/m) is scheduled for later today. At 19:00 GMT, the release of the US federal budget should show a narrowing in the deficit to US$70bn in January from US$80bn previously. WTI trades lower at US$86.27/bbl.

PEPSICO cuts its FY earnings growth target due to higher commodity costs, a difficult economy and investments in emerging markets, sending its shares down 1.8% in pre-market trading. Fourth quarter EPS of US$1.05, however, beats the Street view by a penny. The results come a day after rival COCA COLA surprised the market with sales volume increases in all of its segments. SPRINT NEXTEL unveils 4Q revenue growth of 6% and sees an increase in mobile subscribers for the first time in more than three years. Quarterly losses at the mobile service provider narrowed to US$0.31 from US$0.34 a year ago. Shares climbed 3.4% in early trade. BUNGE reports 4Q profits of US$1.95/share helped by strength in grain merchandising, partly offset by a loss in its sugar and bioenergy segment. Quarterly revenues were also higher at US$12.73bn from US$10.44bn y/y. LABORATORY CORP OF AMERICA beats expectations with 4Q EPS of US$1.34 vs consensus of US$1.31. Quarterly revenues also topped the market, while forecasts for 2011 earnings fell below Wall Street’s assumptions. GOODYEAR TIRE AND RUBBER reports a loss of US$0.73/share, much worse than last year’s earnings of US$0.44/share. The tire maker pointed to one-time items, including the closing of a plant in Tennessee by the end of 2011 as reasons. After last night’s close, CISCO SYSTEMS disappointed with 3Q outlook below market expectations and warned of dwindling public spending and weaker margins from tough competition. On the back of this, shares plunged 10% in after hours trading. The weak outlook overshadowed Cisco’s better-than-expected 2Q earnings and sales. PHILIP MORRIS is due to report its 4Q results later today. Consensus sees EPS at US$0.96 vs US$0.81 y/y. After the close tonight, KRAFT FOODS, DAVITA and CEPHALON are among the companies reporting.

Can HMV survive?

HMV has a hard time. And so do the company’s investors. The Christmas quarter should have showed the best performance of the retailers’ whole year, but instead, HMV disappointed with a huge drop in revenues.

So what happened? In the last 10 weeks to 1 January 2011, sales at HMV fell significantly – at shops that had been open at least two years, sales plummeted -10.8% compared to the same time last year.

Whose fault is it? Well, the management obviously points the finger at the bad weather in December, but that every retailer had to face. So the fault has to lie somewhere else.

There’s the rub

Taking a closer look at the numbers one can see how the wind blows. HMV plc is divided into four different businesses. HMV UK and Ireland, HMV International, HMV Live and its book-unit Waterstone’s.

Worst performer by far was HMV’s core business – the shop with the three pink letters. With a fall in revenues of -14.1% in the UK and Ireland, there is clearly something going wrong.

A research note by Citigroup suggests that HMV really is in a pickle. 2010’s profit before tax was at GBP73.9 million – fantastic compared to what is to come: 2011 should see a drop to only GBP46.0 million, with profits in 2012 and 2013 plummeting further to GBP42.0 million and GBP40.0 million.

Plan B

Bad news. So, what’s the way out? HMV’s management is hoping to trump with a Plan B: 60 stores are to be axed across the UK over the next 12 months, 40 of which likely to be HMV entertainment stores plus 20 Waterstone’s bookshops.

Cost savings of GBP10 million across all areas are also on the cards and the group is expecting to save money on the longer term by lowering its rent expenses.

Survival?

So, will HMV survive this? Maybe. First of all, HMV must make sure it doesn’t breach banking covenants at the end of its financial year in April. Then, it still has to face the fact that its original core business, the selling of music, won’t stop becoming tougher with strong online competitors such as iTunes and Spotify.

Taking all this into account, should one invest? Probably not. With a realistic outlook of no dividend for the coming years, HMV is no company for easy cash-ins. And Citigroup is not the only broker with a negative outlook. In the investment universe, seven brokers recommend sell on HMV shares, seven brokers have a hold rating and only five brokers would buy the stock, according to Reuters.

Euro, dissolve?

First Greece, then Ireland, and now?

The eurozone is in a bit of a mess, and the way out is unclear. European leaders who met for a crisis summit mid-December felt the pressure to create a permanent debt mechanism for 2013, when the temporary European Financial Stability Facility (EFSF) will run out.

This sounds rather productive – however, talks about the possible creation of common euro bonds were abandoned (German chancellor Angela Merkel and French president Nicholas Sarkozy had agreed on a ‘no’ to issuing joint government bonds for eurozone states at their 13th Franco-German Council of Ministers meeting only days before the EU summit). Also, the group remained unwilling to enlarge the EUR 750bn rescue fund.

What does the future bring then?

After credit rating agencies Standard & Poors, Fitch and Moody’s have downgraded their ratings and outlooks for Ireland and Portugal, Moody’s has already warned it may downgrade Spain’s debt as well. Calls for an end to the common currency, however, are short-sighted.

Former market analyst and finance lecturer at Cass Business School (City University London), Simon Hayley, says that leaving the European Monetary Union (EMU) would not be an alternative to government default on the contrary, it would probably trigger default.

Worse, all government debt became denominated in euro on joining EMU. Bondholders would not accept repayment in a new currency that had just been invented – they would regard this as default by another name. A country leaving EMU would find its fiscal problems made worse rather than better. Its new currency would depreciate significantly against the euro.

There is no choice but to stick together. And even though it might be hard for politicians to defend huge bail outs against their voters, leaders agree. In his New Years address Sarkozy announced:

The end of the euro would mean the end of Europe. I will oppose this backlash with all my strength.

In her corresponding speech on the last day of the year, Merkel also pointed out the Euro’s importance:

Germany needs Europe and our common currency. For our own well-being as well as to solve global tasks. We accept our responsibility – even though this sometimes proves very hard.

Politicians, scholars and analysts agree, the Euro must be sustained. However, at least the people’s representatives need to try and get the support of the people…

New York Market Commentary – 23 Nov 2010

Today’s New York Pre-Market Commentary I have written for S&P European MarketScope:

New York Market Commentary – original published 23 November 2010, 14:03 GMT

US stock futures are sharply lower, as concerns over tensions on the Korean peninsula add to ongoing woes over eurozone debt and global currency issues. Reports of an exchange of fire between North and South Korea also sent the oil price down. WTI is currently -1.50% lower at US$80.51/bbl. The mood brightened temporarily, while futures remained in the red, after US 3Q GDP was revised up to +2.5%, better than the expected +2.4%. Core PCE prices for the same quarter are in line with forecasts at +0.8%, with the headline figure at +1.0%. At 15:00 GMT, existing home sales for October will be released. The market looks for a slight fall m/m to 4.49m from 4.53m. Minutes of the FOMC’s 5 November meeting, when the Fed opted for more quantitative easing, are due at 19:00 GMT.

Medical technology company MEDTRONIC tops consensus with 2Q EPS of US$0.82 but cuts its full-year profit forecast due to challenging market conditions. HORMEL FOODS discloses solid 4Q profits of US$0.90m/share vs forecasts of US$0.79. Strong sales across all categories also induced management to forecast fiscal 2011 earnings above Wall Street estimates. CAMPBELL SOUP’s results disappointed meanwhile, as promotions failed to spur sales. 1Q profits are a penny lower than expected at US$0.82. Campell had cut its forecasts for the year earlier this month. PATTERSON COMPANIES unveils better-than-expected 2Q sales and meets the Street view with profits of US$0.45/share. After the close last night, positive news came from HEWLETT-PACKARD. The IT giant reported consensus-beating profits of US$1.33/share and surprised markets with stronger FY11 forecasts. ANALOG DEVICES’ profits also beat expectations. However, the microchip maker forecast a drop in revenues in 1Q, with growth to resume in fiscal 2Q.

In other news, fashion retailer J CREW GROUP is close to being acquired by TPG Capital and Leonard Green & Partners. The offer stands at US$43.50/share, which would mark a premium of over 15% compared to Monday’s closing share price of US$37.65. Elsewhere, DYNEGY plans to end its agreement to sell itself to Blackstone Group because it does not have shareholder support, and it will seek other buyers.

Is Ireland next?

Is Ireland next?

Ireland’s costs of borrowing rose sharply yesterday, as 10-year government bond yields jumped to highs of 8.64%.

Meanwhile, President of the European Comission Jose Manuel Barroso announced that the community would step in with support if the green isle needed it.

Reportedly, Brian Cowen government has refrained from asking the EU for a financial jab so far. For how long Ireland will be able to cope could be the bookies’ new top bet…

New York Market Commentary – 03 Nov 2010

Today’s New York Pre-Market Commentary I have written for S&P European MarketScope:

New York Market Commentary – original published 03 November 2010, 13:11 GMT

US stock futures suggest a higher start on Wall Street, on much better than expected job-data and after the US mid-term election results. The Republicans have gained control of the House of Commons, while President Obama’s Democrats have secured their majority in the Senate. However, this should not have too much effect on the markets, as the outcome was expected. Investors are rather awaiting the Fed’s decision on further quantitative easing measures, likely to result in a multi billion dollar government bond buyback. The dollar steadies ahead of the announcement, while WTI remains on its surge, trading +1.05% higher at US$84.78/bbl. ADP national employment data shows that the private sector created +43k more jobs in October, much more than the expected +20k, offsetting September’s -39k fall in employment. ISM non-manufacturing PMI for October will be released later. Consensus looks for a slight increase to 53.5 from 53.2. Details on durable goods orders and factory orders for September are also scheduled for today.

TIME WARNER’s third quarter profits decline to US$0.46/share from US$0.55 a year earlier. The entertainment conglomerate’s quarterly revenues rose by 2%, still falling short of analysts’ expectations. Third quarter earnings at CVS CAREMARK decreased, as its pharmacy services segment felt the effect of several previously announced contract cancellations. The US drugstore chain and pharma benefits manager cut the top end of its EPS outlook for the full year to US$2.70 from US$2.73 while keeping the low end at US$2.68. US health insurer WELLPOINT posts higher-than-expected profits and raises its full year forecasts. Competitor AETNA’s earnings also top consensus estimates, saying results were boosted by lower member use of healthcare services. The second-largest US homebuilder PULTE GROUP reports a much bigger third quarter loss year-on-year of US$2.63/share vs US$1.15, mainly due to insurance reserves and charges to write down land values. Private equity firm KOHLBERG KRAVIS ROBERTS & CO raises its quarterly payout to shareholders, saying it increased assets under management, while earnings were lower year-on-year. After the close today, NEWS CORP, PRUDENTIAL FINANCIAL and WHOLE FOODS are among the companies reporting.

BIOGEN INDEC plans to cut 13% of it workforce, consolidate research sites and halt some drug development under a broad effort to cut costs. Biogen will focus on neurology and cease its efforts in cardiovascular medicine. It also plans to spin out or license its oncology assets. Elsewhere, Russian fertiliser company Phosagro reportedly plans to bid for POTASH CORP, rivalling BHP Billiton’s US$39bn offer awaiting a crucial ruling from the Canadian government, which will be announced tonight.

New York Market Commentary – 28 Oct 2010

Today’s New York Pre-Market Commentary I have written for S&P European MarketScope:

New York Market Commentary – original published 27 October 2010, 13:03 GMT

US futures indicate a higher start on Wall Street, with strong earnings reports and promising jobless data boosting positive investor sentiment. Both initial claims and continuous claims fell for the week to 434k and 4.356m respectively, surprising the market (consensus: 453k, 4.400m). The dollar slips again, shedding some of its gains from earlier this week, which sends commodities higher. WTI crude trades at US$82.55/bbl, up 0.74%.

EXXON MOBIL posts consensus-beating profits of US$1.44/share, which is 55% higher year-on-year. The world’s largest publicly traded oil company benefited especially from higher crude prices. US chemical maker DOW CHEMICAL reports better-than-expected quarterly profits of US$0.54/share (ex-items) vs the Street view of US$0.51. This reflects strong sales of chlorine, basic plastic and lubricants. 3M’s earnings top estimates, posting third quarter adjusted EPS of US$1.53 compared to consensus of US$1.51. MOTOROLA is back in investors’ good books after its mobile devices business posts an operating profit for the first time in over three years. Sales of smartphones operating with GOOGLE’s Android software were better than expected. MOODY’S results cheer up investors, as third quarter profits rose to US$0.58/share, much more than expectations of US$0.45. The company raises its full-year forecast for earnings per share to US$1.96 from US$1.90, as a pick up in capital markets activity prompted more bond issuers to seek its ratings. While third quarter profits at COLGATE-PALMOLIVE shine, topping the Street view with US$1.21/share, management notes that increased spending on advertising and new product development should put pressure on 2011. This sends shares in Frankfurt down -1.36%. After the bell last night, SYMANTEC unveiled second quarter profits beating forecasts with US$0.34/share (ex-items) compared to expectations of US$0.28. VISA’s fourth quarter update was mixed. Although the credit card company delivered an increase in quarterly profit of more than 50%, shares fell in after-hour-trading due to regulatory concerns. MICROSOFT and EXPEDIA are among those reporting after today’s close.

New York Market Commentary – 27 Oct 2010

Today’s New York Pre-Market Commentary I have written for S&P European MarketScope:

New York Market Commentary – original published 27 October 2010, 13:09 GMT

Wall Street looks set to open in the red, as a rising dollar sends US stock futures and commodities lower. WTI trades at US$81.82/bbl, -0.88% below the settle. The greenback recovered from its recent weakness on speculation that the amount of quantitative easing from the Fed will be lower than anticipated. Durable goods orders climbed +3.3% in September, more than the expected +2.0%; a pick-up after August’s -1.5% fall. Ex-defence goods rose +2.9% (vs -1.4% m/m), durable goods ex-transport fell -0.8% vs consensus of +0.5% and a +1.7% rise in the previous month. New home sales will be released at 14:00 GMT, forecast to edge higher to 0.3m from 0.288m.

PROCTER & GAMBLE pampers investors with first quarter EPS of US$1.02, exceeding forecasts of US$1.00. Volume increased 8% driven by growth in all major geographies and in all its business segments besides snacks and pet care. CONOCOPHILLIPS’ third quarter profits more than doubled, as crude oil and natural gas prices rebounded. The third largest US oil company earned US$2.05/share compared to US$0.97 a year earlier. Cable operator COMCAST unveils third quarter earnings of US$0.31/share, beating forecasts by a penny. Quarterly revenues rose by 7.3% to US$9.49bn. WHIRLPOOL’s third quarter profit disappoints on weak sales. EPS falls to US$1.02/share from US$1.15 a year earlier. Third quarter profits at INTERNATIONAL PAPER are much higher than expected, with EPS earnings of US$0.91 vs forecasts of US$0.79. This reflects a rallying demand, increased pricing and benefits from International Paper’s further diversified business. DR PEPPER SNAPPLE GROUP reports third quarter profits of US$0.60/share just as sweet as analysts expected, due to continued strong growth in Snapple. Quarterly sales volumes grew by 1%, while management keeps its outlook for 2010. After the close today, VISA will let investors peek into its creditworthiness (4Q EPS consensus: US$0.95) and antivirus software specialist SYMANTEC is scheduled to update on its second quarter profits (consensus: EPS of US$0.28).

The CARLYLE GROUP has agreed to buy out communications cable maker COMMSCOPE for US$3.9bn, in an all cash deal, implying a premium of 36% to CommScope’s close on Friday.

European TV sector to gain from ads improvement

Goldman Sachs increases its forecasts in the European TV sector, as advertisement momentum has continued to be stronger than broker expected. Points out that ad spend/GDP are at trough levels, pointing advertisers to an increase in spending. Adds that growing TV audiences also contribute positively and thus believes the outlook for European TV advertising is benign, although it varies meaningfully across companies.

Goldman sees the strongest indications for the UK and Germany. Raises target price on ITV (to GBP0.88 vs GBP0.84) and PROSIEBEN (to EUR 24.00 vs EUR 21.00) and reiterates its conviction buy on the stocks. Broker points out that gross ad data in France has continued to improve, although recent indications have been far more positive for M6 than for TF1 (cuts target to EUR 13.00 vs EUR 13.50, neutral). Thus, increases ad forecasts and target price for M6 (to EUR 19.80 vs EUR 18.40, neutral). Notes that broker also incorporates some benefit as of next year for both French companies from a lower TV tax. Goldman argues that the Spanish TV ad market has slowed down less than broker expected and therefore lifts its ANTENA3 (and ups target to EUR 7.80 from EUR 7.20, buy) and TELECINCO (ups target to EUR 10.20 vs EUR 10.10, neutral) ad forecasts by 1%-1.5% 2010. Ad indications for MEDIASET (cuts target to EUR 5.60 vs EUR 5.80, neutral) are slightly ahead of our forecasts, broker thinks, though this has been more than offset by an increase to our opex assumptions and cuts to network operator and pay TV forecasts.