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Capital 19 Catch-Up – April 30

Hi all. The Catch Up is back this week after a weeks hiatus for the Easter and Anzac day holiday break last week. We’ve put on a couple of extra kilos thanks to all the Easter eggs and hot cross buns we’ve consumed over the last seven days, but we are ready and raring to go with another look at what’s happened over the last few sessions and what we should be looking out for in the week ahead.

The market treated us kindly while we were away with both the Nasdaq and the S&P500 finishing at all-time highs to close out last week. The Nasdaq gained 1.9% in its fifth weekly rise in a row, finishing at a record 8,146.40, while the S&P500 benchmark gained 1.2% to close at a high of 2,939.88. The Dow fell 0.1% for the week as Intel (INTC)  offered poor earnings guidance, and the falling price of oil hit one of its largest components Exxon Mobil (XOM).

Tech Stocks

Technology was the worst performer as Intel brought down fellow chip makers such as Nvidia (NVDA) and Qorvo (QRVO). While it was better news for the consumer discretionaries as Amazon (AMZN), Starbucks (SBUX), and Mattel (MAT) all impressed with their earnings, with Amazon also announcing they would shorten delivery times for Prime members to just 24 hours. I’m still waiting for my drone deliveries!

Social Media

Facebook (FB) was another earnings winner during the week as both profit and revenue beat analyst estimates, and their all-important advertising revenue jumped to $14.91 billion when Wall St was expecting $14.78 billion. Overall, total advertisers increased to over 3 million, while active users jumped to 2.7 billion users, with 1.56 billion logging in every day. The impressive result came despite the social media leader putting aside $3 billion for a potential fine stemming from their ongoing US privacy investigation.

The company seems to be unstoppable at the moment. It is up over 40% year to date, in spite of the scandals and investigations that have plagued them in recent times. Businesses just keep wanting to advertise on their Facebook, Instagram and Whatsapp platforms. They have spent billions in the last few quarters increasing their security, as well as taking a financial hit while being more circumspect in who they sell their data to. These moves should pay off in the long term, and with some clear air, they could really take advertising spend to the next level. Despite the stellar start to 2019 the stock is still reasonably priced and has great potential over the next few years.

Car Makers

Ford (F) also impressed on the earnings front, with the carmaker jumping a handy 10.74% on Friday after increasing profit and margins well above estimates. It was the company’s biggest one day surge since April 24, 2009, and it is now up over 30% year to date. Nevermind that first-quarter revenue was down a whopping 34%, nor that sales continued to be problematic everywhere other than in North America.

Instead, Wall St focussed on their new innovative line up of cars/trucks and its $11 billion investment in electrifying its cars (something our politicians here could take note of). It’s also putting a further $1 billion into self-driving technology. Oh, the day when my car can come and pick me up from the golf club after eighteen holes and a few beers!

Economic Data

Economic data also played an important part in Wall St hitting all-time highs. First quarter GDP grew an unexpected 3.2% according to the commerce department, much higher than the 2.5% that economists were expecting. An increase in exports led the way while imports fell, up and down 3.7% respectively.

Considering that the government was shut down for most of January it was an impressive result. The report has allayed fears of a slowing down of the economy which many media commentators have been keeping a close eye on. Of course, it puts back into play the question of interest rate movements. With an economy continuing to perform it decreases the likelihood of a rate drop, and hence increases chances of a rate rise.

And we won’t have to wait long to find out what the Federal Reserve board thinks of the report. They hold their monthly policy meeting on Tuesday and Wednesday of this week. So, will we see a change in tone from the Fed – from dovish to hawkish?

Most probably not. There were enough warning signs in the fantastic GDP numbers to suggest they’ll remain calm. For starters, it was expected that many businesses sped up imports in the previous quarter to avoid potential costs from tariffs, leaving this quarter’s numbers artificially lower. We’ve also seen a buildup in inventories, which has coincided with a dip in consumer spending growth. Considering this, it’s unlikely the GDP numbers will continue at this pace, so expect to see the usual “wait and see” approach from Powell and Co. Hopefully they’ll do their best not to spook the market.

Earnings Announcements

Besides the Fed meeting, we’ll also be watching some other big economic reports as well as a few big earnings announcements this week. The highlight is the non-farm payroll figures which come out on Friday, but we’ll also have inflation numbers on Monday and monthly car sales on Wednesday.

On top of this, there are over 150 S&P500 companies reporting earnings through the week. The big pharma leaders Merck (MRK) and Pfizer (PFE) both report, along with the two Generals – Motors (GM) and Electric (GE), and Mastercard (MA), McDonald’s (MCD), Yum Brands (YUM), Expedia (EXPE) and US Steel (X). But the big two everyone will be waiting for will be Alphabet (GOOGL) aka Google reporting after the close on Monday morning (Tuesday our time), and the all-important Apple (AAPL) who announce after market close on Tuesday.

Apple earnings are always my favourite day of the quarter, and I know a lot of you either hold or follow the stock so if you’ll indulge me I’ll quickly go through the numbers. We’ll be looking for earnings per share of $2.37, with revenue to be better than $57.4 billion, and then guidance for the next quarter of $2.08 EPS and $51.93 billion in revenue. iPhone sales should be around the 42 million mark, with an overall profit margin in the range of 37-38%.

Apple

The most important number for me, however, is in Apple’s burgeoning services sector. This is where I see the future of the company. It is where you’ll find revenue and profit stemming from the App store, iTunes movie and TV sales, Apple Music, Apple Pay, subscription and licensing fees, and iCloud services. It has been growing at a stunning rate over the last few quarters and I expect this latest one to be no different. An increase of 20% or more would be a great result.

Apple earnings results are usually volatile affairs. Investors will be weighing up the pure numbers, while also keeping an eye on iPhone sales, and results coming out of China which slowed heavily in the last quarter. Forward guidance will also be crucial. Ironically, my favourite Apple earnings are where they slightly disappointment the market – thereby providing a great buying opportunity. I can’t wait to see what we get this time around. Either way, I’ll be up early on Wednesday morning to catch all of the after-hours action.

Woodstock for Capitalists

Following a big week, this weekend will see Berkshire Hathaway (BRKA) hold their annual conference in Omaha Nebraska – otherwise known as “Woodstock for capitalists”. Front and centre again will be Warren Buffett – the Oracle of Omaha, the third richest man in the world, and the investor who has beaten the S&P500 by almost 2.5 million percentage points over the past 54 years. Not a bad effort.

He’s had a rough year though, a rough decade if I’m being fair. As we have discussed in the catch up previously Kraft Heinz (KHC) has been a major disappointment. Berkshire owns a 26.7% stake in the company and has seen nearly $5 billion in losses thanks to the ketchup maker. It will be interesting to see his thoughts on how they are faring, along with how he sees the market going, and the state of the overall economy. It is always an interesting insight from one of the greatest that has ever been, and we’ll report back next week with what is said over the weekend.

Please have a great week and check out below for all of the important economic and earnings data.

Cheers, Paul.

 

Earnings:

  • Tuesday: Apple, Merck, Pfizer, General Electric, Mastercard, McDonald’s, Seagate Technology (STX)
  • Wednesday: Humana (HUM), Hilton (HLT), Yum Brands, Qualcomm (QCOM), Williams Cos (WMB), Metlife (MET)
  • Thursday: Weight Watchers (WTW), US Steel, Kellog (K), PG&E (PCG), Dunkin Brands (DNKN), Under Armour (UA), Church and Dwight (CHD), Expedia, Monster Beverage (MNST)
  • Friday: American Tower (AMT), Dominion Energy (D)

 

Economic Data:

  • Tuesday: Employment cost index, Case-Shiller house price index, Chicago PMI, Consumer confidence, Pending home sales.
  • Wednesday: ADP employment, Markit manufacturing PMI, ISM manufacturing index, Construction spending, FOMC statement, Jerome Powell press conference, Motor vehicle sales.
  • Thursday: Weekly jobless claims, Productivity, Unit labor costs, Factory orders.
  • Friday: Nonfarm payrolls, Unemployment rate, Average hourly earnings, Advance trade in goods.

 

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