Het cijferseizoen tot dusver: the good, the bad & the ugly

VIDEO - Morningstar's Europese marktstrateeg Michael Field verwachtte een gemengd beeld van het lopende cijferseizoen. Is zijn angst bewaarheid geworden? James Gard, Morningstar's UK senior editor, bespreekt met Michael de resultaten van de Europese aandelensectoren.

James Gard 12 februari, 2024 | 0:25
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James Gard: Welcome to our monthly sit down and discussion of earnings and everything that's going on in the markets. I'm delighted to have in the studio with me Michael Field. He is European Market Strategist.

Earning season, it's mostly done. What's your verdict? You said you're expecting mixed picture, but has it panned out that way?

Michael Field: I think it's definitely lived up to the billing of a mixed picture anyway. We've had some good, some bad and some ugly results on the back of that. And yeah, we can talk about it a bit more, but no, I think we've seen everything. I think investors didn't really know what to expect going into this earning season. And you've seen that from some of the share price moves, some of the large share price moves, both positives and negative, over the last couple of weeks as investors try to adjust to all the new information they're being pommelled with.

JG: So, apart from our monthly changes to valuations is anything that really surprised you from this earnings season that basically has – has anything affected your world view really?

MF: I wouldn't necessarily say my world view. What I would say is that some of the themes that we were seeing previously have become more exacerbated. So, I think things like the consumer, for instance. It's clearly become more difficult for consumer-facing firms over the last number of months. You've seen that in some of the retail sales numbers for Europe, but also, you're seeing that in the results too from some of these companies, companies that some previously had been doing quite well and holding up quite well in the difficult environment are suddenly saying, okay, now things are even more difficult for us.

JG: That's really interesting because you would have thought that actually now the times are improving, inflation is falling. But you said that consumers have reached a limit in terms of price increases. So, that's really interesting. But how does that fit in with the idea that companies like Unilever, Procter & Gamble still have brand power and are still able to charge a premium?

MF: So, I think those two things don't contradict each other necessarily, right? So, what's happened is you've had two years of high inflation. These companies have been pushing through price increases but with difficulty. So, some things like Procter & Gamble and the likes of Unilever have been achieving pretty good sales growth kind of high single-digit levels, but that's mainly been priced that the volume portion of that's very low. So, people are in fact buying the same amount as before if not less, but they're just paying a higher price for it. And these companies do have some brand power to get this through, but not every company has that brand power. And you've seen that in this earning season where some companies you had actually been getting these price increases, their brands are really being tested because now they're saying, okay, we've been putting through price increases for almost two years now and now we've reached the point that consumers are literally buying less stuff, they just don't have the money and don't have the love of this brand or this product to actually keep paying those price increases. So, it's been really tested is what I would say.

JG: Yeah. I mean, there's a consumer staples element, but there's also, I'm thinking of luxury and always surprised me, and luxury has been a mixed bag – excuse the pun – in the last earning season. But companies like LVMH, there was a 20% increase in earnings year-on-year, big increase in the share price. So, they seem to exist in a category of their own. I don't want to single out LVMH, but luxury has always puzzled me. Obviously, it did well in the pandemic, people saving lots of money and thinking maybe I'm going to spend on shoes or a bag, whatever, but certain companies just seem to exist above the fray really.

MF: That's fair. But I would say even within that, and this comes back to what I was saying earlier about it being a really mixed picture, even within sectors and sub-sectors like luxury goods, it's still really mixed. So, if you had taken a look at Burberry share price over the last number of months, it's collapsed quite heavily. It looks very attractive now based on our current fair value estimate for the stock. There's a lot of upside. But operationally, they've struggled quite a lot over the last six to nine months. LVMH, as you mentioned, is the counterpoint to that that's seeing these huge sales increases and trying to square that circle is quite difficult. The only way in which I can point to some logic around it is that some of these brands are involved in quite niche maybe growth areas that are suddenly seeing an element of structural uplift in growth, or essentially, they've hit a bit of a purple patch, and that's what's buoyed the results of LVMH but hasn't done it for Burberry. And then you've got other things, kind of little luxuries for instance like Lindt chocolate which is doing very well at the moment as well. They've managed to put price increases through. But that's not true to say of every luxury good firm or indeed consumer-facing firms. Some of them are really struggling.

JG: Sure. With Lindt and Easter coming up, that's good news them, I guess. So, thinking about AI – sorry to change subject so dramatically – I feel like people have exhausted the subject and I feel a bit tired of it already. But AI – I mean if you look at earnings season, anything associated with AI has done well. I'm thinking Meta, Palantir, we've still got NVIDIA to come, we've got that whole circus around NVIDIA at the end of the month. I mean, reading your summary of earnings season you said that there are very few attractive entry points into AI. So, if for example, you want to invest today, you want exposure to AI as a theme. How can you do it because even companies in Europe with AI exposure are overvalued?

MF: That's fair on the whole that comment, yeah, absolutely. I would say anytime there gets to be a lot of hype about a certain segment or a certain area of the market like we have now at AI, valuations just buoy as a result. If you look at the P/E of NVIDIA for instance, it's astronomical at the moment, which is always dangerous from an investor perspective because when you buy a company with a P/E that high, the expectations baked in then for growth are huge because ultimately that has to get back to a normal level of P/E at some point in its timeline. So, there's a lot of downside risk with these companies. I would say, if you look at our fair value estimates for two of the big ones, so ASML and NVIDIA currently, they're not astronomical. So, despite the fact that on the P/E basis, they're very high, we think those two companies are around 15%, 20% percent overvalued. So, it's overvalued. It's not like you should be rushing in necessarily. But it's not crazy overvalued is what we're saying. There is some element of truth to the story that it is very, very high growth. But at the same time, you're paying a premium for that at the moment.

JG: Yeah. That's the problem with investing is you see a theme, you see it's hyped, you don't want to overpay. But then you can miss out because NVIDIA could have years of growth ahead of it and certainly, I remember last year we adjusted all our models with NVIDIA in terms of big ramp up in growth. So, yeah, it's a tricky one for investors. Moving on to pharmaceuticals, GLP-1 is a phrase that I wasn't expecting to say but no Novo Nordisk is another one of these European companies which everyone seems to be excited about, but you think that's now richly valued.

MF: So, it's another company that falls under that bracket of hyped. So, I think the fact that people on the street are familiar with that acronym you just used for a drug whereas no one would have known that nine, twelve months ago is just testament to the level of exposure that these stocks have got and how hyped up it is. I think what we're seeing in the market now, especially in pharmaceuticals is that the companies that are involved in anything to do with obesity have seen their valuations ramp up hugely over the last six, nine months. And other companies in other quite attractive areas of the biotech and things like this as well, oncology, immunology, these companies have seen their valuations dwindle as a result. The interest has shifted over towards the anti-obesity drugs. So, I think Novo Nordisk, is there a lot of growth potential ahead for them? Absolutely. They're the leader in this drug out and out. But at the same time, we think that stock is overvalued at the moment. And yes, you could chase it, but there's a lot more low-hanging fruit in other areas of pharma.

JG: Sure. I mean, I feel mixed things about it, because obviously, it's a European success story and it's a company that has now has global reach, but you want that to be sustained rather than just – obesity drugs are the kind of AI of the pharma world as everyone rushes in, everything gets overbought. But you're still a big fan – Pfizer was a huge name during the COVID era, but you think Pfizer is undervalued.

MF: One of the companies, absolutely, yeah. What I would say is some of the companies and you mentioned COVID, during that period, they had this huge ramp up in COVID drug sales. Obviously, we all heard about this. But the tail effect is that it's coming through now. So, you're seeing sales of these drugs tail off massively over the last year or two. And then what that creates is a very high comparison base. So now when they're saying our sales relative to 2022 or 2021, you're seeing these falls and investors are looking at the top-line numbers for these companies like Pfizer and saying, this thing isn't growing at all. Whereas an actual fact, what they're missing out on is the fact that these companies do have really good pipelines ahead of them. And that at some point in the next few years, sales from those pipelines are going to overtake the declines that we're seeing from COVID drugs, and then you've got a good ramp up of growth suddenly, and then investors will look and say, okay, suddenly this is interesting again, but they've probably missed the boat at that point from the valuation perspective.

JG: Well, that's a tricky thing for investors, isn't it? Because, they don't have the patience to say, well, in the future, this will come good and we're at the bottom of the cycle. But like you say, far-sighted investors or institutional investors, maybe say, look, we'll just wait until those pipelines kick in. But at the moment – again, you say that's an attractive entry point and a margin of safety to get into Pfizer, maybe rush as well. 

MF: Indeed. I think, look, it's to some degree, the picture, you have to look ahead. You can't just look right now. And sometimes you just have to bite the bullet and say, okay, it's not loved at the moment. It might decline slightly further in the next couple of months, but over the medium term, there's a lot of upside with these stocks.

JG: Sure. So, to abrupt shift of tone to shipping, and I know I'm starting to fret about freight rates in the Suez Canal, Cape of Good Hope, sort of thing that I never even thought about before. We've just had Maersk results today, big drop in the share price. Has anything shifted in your – I know you cover shipping stocks – has anything shifted in the last few weeks?

MF: Not in the last few weeks. I would say the Red Sea situation – and we've talked about this reasonably extensively for the visibility that we have on the situation. But it's dynamic, right? It's just developing kind of day to day. I think in the beginning, we felt the likelihood of it getting fixed in the short term was high. And now hopes for that have faded. So, it seems very much like a medium-term situation now, something that could end up lasting well into 2024 or even toward the end of the year, possibly. So, I think that's still having a disruptive effect on the stock. If you look at the results today, for instance, the numbers were in line with what was expected for 2023. The difference being, okay, they've announced a demerger, which adds another layer of complication to it. But I don't think that's the main cause of the share price fall you mentioned today.

I think it's more around, look, they've said for 2024, our guidance range is really wide because we don't know what's happening. The Houthi Red Sea situation is still ongoing. So, they've suspended their share buybacks as well amidst the uncertainty around that. And I think the market is suddenly taking those things as kind of quite a negative. And then they've factored that into the share price today. But this isn't the first time for Maersk. For the whole of 2023, they were downgrading profits consistently, their guidance for 2023 profits. And I think this year they're just trying to come in with a clean slate and say, look, we don't know what's going to happen. This is kind of a wide range of expectations we have. And the markets are taking all that negativity into one day.

Gard: Yeah. I mean, I think that's sensible from a company point of view, but it seems a bit irrational from an investor point of view. But like you say, the shares had a really good run up so far this year. Best-performing share in Europe so far this in January.

MF: Could well be. Could well be. It had a nice run, albeit off a low base is what I would say. 

JG: Yeah. So, an adjustment to expectations is normal in markets, isn't it? But you were saying, reading your report, in terms of trends in shipping is rather like the oil tanker that takes a long time to move. Trends change slowly. There isn't just a sudden shift in dynamics.

MF: No. That's a very good analogy, given that the last Suez Canal incident was indeed an oil tanker that tried to turn very slowly.

JG: And we've had another one since this got stuck.

MF: Indeed. 

JG: But it seems tough that the world depends on a very, very small shipping canal, but that's…

MF: And another one in Central America that is having its own issues with climate change and stuff. So, I think those two things, as amusing as we're making them sound, are indeed testament to how fragile the shipping network it is, which is something we've realised during the pandemic and now we're seeing again with these Red Sea attacks.

JG: Yeah. But I mean, I guess people might just have to wait longer for their goods, perhaps. I mean, it could be the world adjust to not instant logistics and…

MF: That's certainly what's going to be felt now with certain goods. I think also what you saw since the pandemic is that whole concept of nearshoring, so European retailers and industrial firms bringing some manufacturing back to Southern Europe or North Africa or Turkey and U.S. firms bringing manufacturing closer to the border in Mexico, for example, to counteract those issues that you mentioned.

JG: Yeah. I mean, I guess the world adjust to new problems, doesn't it? I mean, I realised we were running out of time a bit. So, I was thinking about the next time we meet what will be going on. We've got U.K. budget. We've got Fed at the end of March, and we've got Bank of England as well. So, the earnings season may be over – can't really over, but there's still a lot to go on in the next few weeks.

MF: Yeah, indeed. So, I think, yes, earning season, we've got a few companies, because some of the big ones too left to report. So, I think there still could be a few left field surprises to come through. That's one thing. And then I think from there, the picture moves onto the macro, like you said. To some degree, the Fed minutes and the Fed decision is less relevant to Europe than it was maybe a year or two ago. But I think the paths have diverged. The economic situation is weaker in the U.K. and in Europe than it is in the U.S. So, central banks in Europe have a slightly different problem to adjust to and they could well cut rates before the Fed. So, I think that's the kind of decisions to keep an eye out for. Are we expecting anything immediate in March? I think that might be a little hasty. But it's definitely worth watching and analysing the changing language to see if that's softening up for the next Fed or for the next Bank of England or the next ECB meeting rather.

JG: Yeah. I mean, there's certainly a lot going to go on in the macro this year. And the first rate cut will feel like a significant amount, whichever central bank is going to be first, probably won't be the ECB.

MF: We'll see. You never know. But I think, yeah, it's like you said. It's the direction of travel is the main thing rather than the quantum of the rate cut.

JG: Brilliant. Anyway. So, join us again soon in the studio if you can, but I might see you virtually next time. But thanks for your time today. And for Morningstar, I'm James Gard.



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Over de auteur

James Gard  is senior editor bij Morningstar.co.uk.

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