reports
- Hamilton Faber
- Kunaal Malde
- CFA
V/MA: strong core, adjacencies more competitive
V/MA remain core long term holdings with secular cash to card tailwinds driving strong growth long term, supported by developments such as contactless. Valuation remains reasonable, although newer growth areas such as B2B face greater competition. We remain Overweight V/MA, raise our price targets to $173 and $250 respectively and currently favour V which trades on a PE of 28x, three turns lower than MA.
- John Heagerty
- Nadja Heini
- CFA
Banks: Trading update and 3Q18 preview
Market volatility has moderated significantly since the beginning of the year, ceasing to be a tailwind for the banks' trading revenues in 3Q18. Despite the strong IB pipelines (announced M&A is up 40% YTD), fee pools have been affected by timing issues and are down 15-20% across the industry for the current quarter. Medium term, the outlook remains positive thanks to improving GDP growth, benign credit conditions, rising interest rates and a deregulatory focus. We have lowered our 3Q18 EPS...
- Barry MacCarthy
EPS cut on further hydraulic fracturing slowdown
We cut EPS forecasts (e.g. FY19 by 12%) following HAL's downbeat outlook for near-term onshore US fraccing, its second bearish guide in three months. We forecast a 17% peak to trough decline in US fracc crews, with HAL revenues declining by a proportionate amount. We see a H219 pick-up as E&Ps gear up to fill new oil pipelines from the Permian. We remain Neutral with a $44 price target (from $45).
- Sam Hudson
- CFA
Model Update
AZO's Q4 comp proved modestly disappointing, considering the current industry momentum, with company-specific challenges weighing on sales in the middle of the quarter. We estimate that online promotional shifts and out-of-stock issues impacted comps by 60-80bps. We believe the broader backdrop remains robust however, with stronger trends as AZO exited the quarter, but view ORLY/AAP as better positioned to capitalise on these trends. We remain Neutral on AZO.
- Daniela Nedialkova
- CFA
Strong Q1, faster than expected recovery in NA
Nike reported Q1 EPS of $0.67 vs consensus $0.63 with in-line revenues. It was a strong quarter, delivering on the promised revenue and margin acceleration and indicating further trend strengthening. The stock was off 4% after hours, as it is difficult to beat the very high expectations, but Nike should remain a core investment on brand momentum and growth opportunities across all lines of business.
- John Heagerty
- Nadja Heini
- CFA
Financials: structural & cyclical drivers remain positive
Within financials we are positive on the banks, life insurers and insurance brokers. Valuations remain appealing, particularly for the life insurers, and cyclical drivers, such as strong equity markets, rising rates and improving GDP growth are favourable. We are more cautious on the P&C sub-sector, given the excess capital in the industry, as well as the ratings agencies due to valuation. Our top picks within financials are C, GS, MET and AON.
BAC BANK OF AMERICA CORP
MS MORGAN STANLEY
C CITIGROUP INC.
WFC WELLS FARGO & COMPANY
CMC JPMORGAN CHASE & CO.
GS GOLDMAN SACHS GROUP INC.
CB CHUBB LIMITED
AIG AMERICAN INTERNATIONAL GROUP INC.
MMC MARSH & MCLENNAN COMPANIES INC.
PRU PRUDENTIAL PLC
SPGI S&P GLOBAL INC.
MET METLIFECARE
- Richard Radbourne
Higher Valuation Should Follow Spins
We expect HON to follow H118 with another strong performance in H218, while at the same time complete the planned spins of its turbo and home security products/distribution businesses. We believe the spins should lead to a stronger valuation for the ongoing HON portfolio and reiterate our Overweight rating.
- Daniela Nedialkova
- CFA
- Edward Lewis
US HPC - Initiating Coverage: O/W: EL, CHD & PG; N: CLX & CL; U/W: KMB
For many years, the Household Products and Personal Care (HPC) sector offered attractive long term growth providing products that address the daily needs of millions of consumers around the world. Underlying mid-single digit category growth was supported by innovation, pricing, acquisitions and geographic expansion to support attractive high single digit sales growth which saw the sector earn a premium valuation. However, the growth profile is not what it once was and the sector's valuation has ...
- Barry MacCarthy
Remain Overweight despite slow international recovery
A recovery in International E&P activity has been frustratingly slow, with higher costs than we had assumed, which we reflect in our reduced earnings forecasts. However, a recovery is finally underway and is broadening across key regions, supported by favorable oil prices, a cumulative deficit in spending and a falling inventory of ready-to-produce volumes held by S&P Energy stocks. Despite poor YTD share-price performance (-9%), we argue it is the wrong time to turn pessimistic on SLB. Accordin...
- Daniela Nedialkova
- CFA
Strong turnaround, looking for an opportunity
Having recently met with management, we have high confidence in the turnaround at the brand and the long-term targets set at the recent investor day. The foundation for strong and healthy growth has been set and we see a good chance for incremental upside to targets. Valuation and a likely quieter Fall season keep us Neutral for now, and we are looking for a better buying opportunity for what we see is a high quality, long-term, branded growth story.
- John Heagerty
- Nadja Heini
- CFA
Deal highly EPS accretive, but some concerns
MMC today announced the acquisition of Jardine Lloyd Thompson (JLT) for $6.4bn at a 34% premium to yesterday's close. The deal should complete in spring 2019 and be immediately accretive to cash EPS. The EV/EBITDA multiple of 19.5x looks expensive but moderates to a justifiable 11x when taking the full targeted cost synergies into account. We calculate that the transaction will be 9% accretive to adjusted cash EPS in 2021 but this moderates to 4% accretion if the buyback is cancelled for two yea...
- Steve Chesney
Alopecia data tees up potential blockbuster
PFE presented the first proof-of-concept data for two JAK inhibitors in the treatment of alopecia areata. While still early, initial efficacy and safety data are encouraging. PFE is in the lead in this potential multi-$b indication and these data further support its aim of launching 15 blockbusters over the next five years.
- Kunaal Malde
- CFA
ATVI/EA: update on core IP and key growth drivers
Activision's upcoming CoD introduces a battle royale mode that should expand the game's addressable market, while the company has several continuing growth drivers across mobile, MTX and advertising. We increase our YE PT to $85. Conversely, we trim our EA PT to $140 due to execution issues and the Battlefield related guidance cut. But we remain Overweight given the ongoing digital tailwinds and continue to expect re-acceleration of FIFA Ultimate Team.
- Steve Chesney
Pharma review offers few material updates
JNJ's pharma business review reiterated the aim to grow above the market via additional indications, Actelion and up to 10 blockbuster launches by FY2021. We see a mix of successes and setbacks for the JNJ pipeline over the last two years and continue to question whether the pipeline is enough to offset rising generic/biosimilar and innovative competition. Maintain Underweight.
- John Heagerty
- Nadja Heini
- CFA
Executing well, remains undervalued
Citigroup has announced an increase in its financial targets with the most important being the 50bp increase in its 2020 RoTCE target to 13.5%. As part of this, management also provided a clearer pathway to an efficiency ratio of 53% in 2020, implying ~200bp of improvement in 2019 and 2020. This is considerably faster than the market anticipated. We have adjusted our forecasts such that we reach a ratio of 54.0% in 2020. This adds ~1.5% to our FY19 EPS and ~3% to our FY20 EPS while leaving room ...
- James Cordwell
New iPhones test pricing power
With its new iPhone line up Apple has pushed pricing higher, highlighting how it is increasingly reliant on ASP to deliver revenue growth. Evidence to date that iPhone demand is relatively inelastic suggests Apple should be able to drive through these price increases, but with the feature differential across the portfolio arguably narrowing as the spread in prices simultaneously widens, we do see a risk that consumers will trade down to lower tier devices. Combined with a multi-year high PE, we ...
- Steve Chesney
Filgotinib RA data an incremental positive
FIrst Phase III data filgotinib in RA patients looks solid and while not necessarily significantly differentiated on efficacy, the safety profile could be an advantage vs other JAK inhibitors in development. We await further clinical updates including Ph III RA and Crohn's data in 2019 as well the MANTA trial looking at potential filgotinib toxicity in males. We revise up probability of success in RA to 80% and increase peak sales estimate to $2.1b from $1.7b and increase our DCF-derived target ...
- John Heagerty
- Nadja Heini
- CFA
Modest capital raise, as expected
FRC announced its first share offering of the year and is set to raise 2.0-2.3m shares in a range of $101-103, which should raise $200-240m. We were already forecasting a capital raise of 2.0m shares this quarter so the impact on our forecasts is minimal. If management exercises the greenshoe then the additional 0.3m shares will be 0.2% dilutive to our FY19 EPS but 0.2% accretive to BVPS. The share offering is priced at around 2.2x 2018E BV and 18.5x 2019E EPS. The capital injection will boost t...
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