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Equity Strategy: US earnings Q4 preview: Two major stocks to watch
S&P 500 EPS seen just higher in Q4
Valuations are stretched after 2019’s multiple
Tesla & Apple are top stocks to watch this earnings
It’s easy to miss it, but US earnings season gets underway
next week as the big banks begin reporting on Jan 14th. Weak
corporate earnings growth could dent optimism around US stocks, but with the
fourth quarter of 2019 out of the way, the market’s real focus is going to be
whether we get the 10% earnings growth forecast in 2020.
Consensus estimates indicate a 1-2% decline in Q4 earnings,
but the tendency to beat expectations suggests we will see earnings growth,
Last year we saw multiple expansion massively outweigh
earnings growth as the driver of the 28% rise in the S&P 500 last year.
This poses problems as it means valuations are already rather stretched and
reliant on strong EPS growth in 2020. The S&P 500 forward PE has jumped to
19 from a start of about 14 at the beginning of 2019, having averaged 16-17
over the last five years. Remember though that the starting point of the year
was exceptionally weak given the Christmas 2018 drubbing. From the 2018 high
through the recent all-time highs, the S&P 500 has only risen by a more
Two top stocks to watch this earnings season
Tesla – The stock has enjoyed a remarkable run
up to record highs at $472 as the company turned a profit in Q3, reported a
surge in deliveries and sent investors into a frenzy with its Shanghai plant
and promise of electric growth in China. That and a huge amount of short
Shorts have been crushed. A surprise profit in the third
quarter has been the catalyst while we have seen remarkable progress in China
and with the Model Y. Last week Tesla said it delivered 367,500 vehicles last
year – double that recorded in 2018. It was above the forecast of at least
360,000 offered in Oct, but still at the low end of the expectations for
360,000-400,000 forecast at the start of the year. Investors seem to be
shrugging off the fact that growth in 2019 was below the run rate seen in H2 2018
as it ramped production to beat a cut-off for US tax
In Q3 Tesla made $143m
against a loss of $1.1bn in the first half. And revenues came in at $6.3bn,
down from $6.8bn a year ago and short of the $6.5bn expected. Deliveries had
reached a record in the quarter but fell a little short of expectations.
We suggested in October when the Q3 numbers were released
that this could be the turning point for this battered stock. After spending
big to get the Model 3 out the door it’s managed to cut costs by 16% and has
cash on hand of $5.3bn. The company expects the higher margin Model Y will
vastly outsell all other models ‘combined’.
That cash pile will be needed though as Tesla also plans to
create a new ‘gigafactory’ in Europe and invest in rolling out its new Semi heavy
duty electric truck.
The usual concerns remain
– cost control, production capacity and the fact that despite being very firmly
in the growth category vehicle deliveries remain a problem. The breakneck speed
of production in H2 18 seems to be a high watermark. Moreover, like a number of companies
that have attracted great attention but have yet to consistently make a profit,
Tesla has not had to contend with a recession yet.
The Analyst Recommendation tool on the
Markets.com platform indicates the Street remains split – analysts still don’t
agree on this one.
Apple – The fiscal first quarter is always
Apple’s strongest as it chalks up the holiday season and new iPhone models.
We’ve had decent indications from the Services side of the
business indicating that its pivot to being more of a Services business is
in full swing. App store customers spent a record $1.42bn between Christmas and
New Year, 16% up on last year, the company has said. Management also revealed
that Apple News is drawing over 100m monthly active users across the US, UK,
Canada and Australia. This is all to the good – Services margins are about
double that for the rest of the business and will mean re-rating of the stock
The stock has run up quite a head of steam to hit $300.
We’ve seen a potential topping pattern on the chart as it fails to make new
highs and the 14-day RSI indicating overbought conditions. MACD could also be
turning. Moreover, on a trailling 12-month (TTM) basis Apple’s PE has soared to 25 from
around 11 last year. Upside potential may therefore be limited. A lot depends
still on iPhone sales.
Our analyst recommendations tool highlights that while the
broad consensus on the Street is positive, the average price target indicates
the stock may have topped out, temporarily at least.
One thinks that the Street is just playing catch up and
will rerate, although it’s fair to say that Apple stock is relatively expensive
vs its historic average.
Apple posted record Q4 revenues despite slower iPhone
sales and guided for a very strong holiday quarter. Earnings per share beat
handsomely at $3.03 vs $2.84 expected and up 4% year on year. Revenues jumped
2% to $64bn.
iPhone sales matter a lot less…
The improvement on both
top and bottom line in the fiscal fourth quarter came despite a 9% drop in
iPhone sales. Whilst that’s not as bad as the 15% type level seen recently, it
shows how much of the lifting is now being done by other parts of the business.
It suggests Apple is reaching an inflection point where it’s no longer
dependent on the iPhone for EPS growth. This is across the board a
positive. Indeed for 2019 as a
whole, iPhone sales fell 14% but the
stock was up 89%.
…because Services and Wearables are roaring ahead
Wearables, Home and
Accessories knocked it out the park, with sales up 54% to $6.52bn. This was by
far the fastest growing segment and will account for an increasing percentage
of sales, currently c10%.
Services growth remains good at 18%. Stripping out certain
one-off items that knocked the Q3 number, this represents consistent sequential
growth from the last quarter. Whilst still very positive, it’s a comedown from
the +20% levels seen in preceding quarters. But with a clutch of new services
rolling out, not least Apple TV+, a renewal of past growth rates is on the
cards. Higher margin, recurring Services revenues are a key reason why multiple
expansion may be maintained.
American consumers are in good shape
The US consumer remains
strong. Almost all the growth came from the Americas, which is dominated by US
sales. American consumers still look in good shape. Sales in Europe, Japan and
Greater China fell.
Holiday quarter could be record breaking
Guidance for the fiscal
first quarter is bullish, and Apple could mark a record for quarterly revenues.
Apple is guiding revenue of between $85.5 billion and $89.5
billion. Early indicators suggest the iPhone11 is performing well with
consumers. Favourable comparisons in China from last year are assured, given
the previous year’s downswing in iPhone sales in the region.
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