BMW (EUR 70.25) – BUY – Target price (YE 2013E): EUR 86.99; potential +24%
A valuation in line with the 10-year average historic valuation of 10.2x implies a share price of EUR 88.05 at year-end 2014E and time-discounted (yield of 10-year Bund), a target price of EUR 86.99 at year-end 2013E, which is 23.8% above the current share price (EUR 70.25) and in line with our previous target price of EUR 87.24 (March 18th). (See our latest company reports ‘BMW – 1Q13E preview’ of April 30th.)
Weekly Investment Conclusion: We are advising clients to use the temporary seasonal weakness to increase holdings towards select equity strategies, as equities are the better value asset class, versus cash, bonds, alternatives, combined with the lowest downside risk.
For our clients with a shorter term investment perspective, we recommend to take profits in equities sectors with seasonal weakness, as we see evidence of equity markets rolling over temporarily, and for bonds to enter their period of seasonal strength until mid summer.
Currently the number of US companies that have reported sales above estimates are at a mere 44.1% based on results released for the first quarter, thus far. The current quarterly revenue beat rate is the third lowest in over 10 years, beaten only by the fourth quarter of 2008 and the first quarter of 2009, just as the recession was beginning.
We believe that the actual data, whether it relate to the broad economy, to actual negative currency impacts, or to earnings, fail to catch up to expectations, a correction in forecasts may be in order, the result of which would likely lead to a correction of stock prices as well.
Again, we see more evidence in increasing metrics for investors to brace themselves for a 6% to 10% pullback in major global equities markets, and surely also for the US markets.
Just as an update on a major subject, which most sell side economists, strategists and analysts have grossly overlooked still so far yet, the impact of a temporary strengthening US$ against major currencies like the Yen, the Euro on US exports/imports, current account, and on corporate revenues and earnings. We had started to point to this significant subject in our Q 2 Global Strategy Outlook, and already do we see impacts of this highly overlooked and underestimated subject on earnings releases for major US companies, like Caterpillar, Coca Cola, AAPL, JBL, BA, to name just a few.
In March, the global light vehicle markets declined 1.5% yoy to 7.96m units, after having declined 6.2% yoy in February, resulting in a 1.6% yoy increase in YTD, according to LMC Automotive. The SAAR (seasonally adjusted annualised rate) of sales was 81.26m units/year, 2.0% higher than February’s 79.68m and 5.4% down from a record 85.91m in January. YTD, the SAAR was 82.83m, 2.3% higher than FY12’s 81.00m. In FY13E, the global LVs markets are expected to grow 2.8% to 83.2m, which implies a considerable deceleration from last year’s 5.3% and is in line with our previous forecast. (See GADA March 2013 edition of April 1st, 2013.) From 2014 onwards, the markets are expected to accelerate again and to grow by almost 7% p.a. in 2014E and 2015E.
This past weekend’s meeting of the G-20 has been described by some as highlighting that there is only minimal coordination between the main economic powers. Japan was not singled out for reprobation. The G-20 and the BoJ have made it very clear to the financial community that Japan has the green light regarding continued quantitative easing and resulting in continued Yen weakness. We expect the US$/Yen 100 level will fall soon, and moving towards our 2013 price target in coming months. Short term, we expect the US$ to run into resistance at the psychologically important US$/Yen 100 level, which it hasn’t crossed since April 2009.
Apple stock traded below US$ 400 for the first time since 2011, just prior to the exuberant and parabolic rise to US$ 705 in 1H 2012. Yesterday APPL fell 5.50% following a weak sales outlook from key chip supplier to Apple, Cirrus Logic. Shares of AAPL are down around 42% since the stock peaked in September of last year, when we put a “Sell/short” recommendation on AAPL at US$ 685, this amidst concerns that Apple is losing its market dominance.
The fact is, the US$ index is down over 33% in the past 35 years. Below we have added a few charts elaborating on a major subject which we clearly part with the “so called experts” on economics, and stock markets, who are now predicting a period of US$ strength, paired with simultaneous strength and outperformance of US equities:
Well, for those “experts” and their opinions, let’s see if they have a point, as we believe a few pictures are worth a few million (wasted) words. Let’s look at the chart of the US$ versus the S&P 500 going back to 1980.
Equity markets around the world recorded significant technical weakness yesterday. Much of the weakness was recorded prior to the Boston explosions. The explosions accelerated weakness near the close. The 9.1% one-day slump for the price of gold was the steepest fall in 30 years. Gold prices had recovered by as much as 2.0% this morning. The CME Group Inc. said yesterday it was the minimum collateral requirements for trading in benchmark gold, silver and other precious-metals futures contracts. The CME also raised the margin to trade palladium by 14%, and for platinum by 19%.
Daimler (EUR 39.44) – BUY – Target price: EUR 51.97; potential +32%
At EUR 39.44, Daimler shares are currently valued at 7.2x prospective 2013E earnings and 6.7x prospective 2014E earnings; the latter is at a 36% discount to the 5-year average historic valuation of 10.5x and at a 25% discount to the 10-year low historic valuation of 8.9x. This is inconsistent with the implication that our estimates for 2014E EPS (EUR 5.91) are 44% above the 5-year average of EUR 4.11 and 63% above the 10-year average of EUR 3.62.
A valuation in line with the 10-year low historic valuation of 8.9x implies a share price of EUR 52.63 at year-end 2014E and time-discounted (yield of 10-year Bund) a target price of EUR 51.97 at year-end 2013E, which is 32% above the current share price and 15% below our previous target price of EUR 60.91 (February 11th). (See our latest company report ‘Daimler: 1Q13E preview’ of April 16th.)
Well, the profit taking has started. Despite continued resilience in the US equity markets, benchmarks around the globe have begun to trend lower, showing a series of lower-lows and lower-highs, a characteristic of a negative trend.
“Sell in May” has come early for equity markets in Canada, Germany, France, United Kingdom, and China. Negative pressures in equity benchmarks around the globe combined with significant declines in commodity markets is resulting in an increased probability that a top in United States equity markets is near, if not already realized. Trend line support for the S&P 500 is presently just above 1550, making this a logical point to trigger the conclusion to the seasonally favourable period for the market, which ends on May 5th, on average.
The Euro has realized rather pronounced declines since the start of February, but recently momentum indicators have diverged from the short-term price action, indicating that selling pressures were abating. The intermediate trend is noted to have changed, but a continuation of this short-term rebound is reasonable as the currency corrects an oversold condition. A retest of the 50-day moving average around 1.32, and even up to 1.3450 is increasingly probable as the currency exits a period of seasonal weakness that concluded at the end of March.
Euro strength has generally coincided with US$ index weakness, often seen as a positive catalyst for equity and commodity prices.
The US$ index is showing signs of rolling over from its recent positive trend. The US$ index is pushing towards its 50-day average as seasonal weakness in the month of April pressures the currency lower.
As per our prior warnings, sell side analysts have been like usual late to the plate with regards to currency adjustments for US companies.
For now, consensus estimates show that first-quarter earnings reports released by major US companies will be sluggish. Consensus earnings estimates for the 30 Dow Jones industrial average companies shows an average (median) gain of only 3.1 per cent on a year-over-year basis.
With 25% of S&P 500 earnings coming out of Europe, and 6% coming from Japan, we think that most sell side analysts are behind the curve on this. The negative impact on first quarter earnings by international companies due to strength in the US$ on a year-over-year basis will be mentioned frequently when first quarter reports are released during the next three weeks. The US$ Index averaged approximately 81.0 in the first quarter of 2013, up from approximately 79.0 in the first quarter last year. At the end of the quarter, the Index was at 83.14 versus 79.00 last year. However, the US$/Yen has fallen by -31.5% since September 2012, which is in line with our forecasts, and this will weigh significantly on EPS for Q1 and will continue to be a negative surprise for analysts throughout 2013, particularly, as we anticipate the US$/Yen to be at 1.12 by year end 2013.
“Sell in May & Go Away” or is it “Sell in April”, like it was in 2012?
Japanese companies see the continued weakening of the Yen as an opportunity to increase investments abroad, and are buying foreign assets. European companies are generating more than 50% of their earnings from outside of the Eurozone, and for the Eurostoxx 600, about 30% of earnings are coming from emerging markets. Hence why we see better buying opportunities in Japanese and European stocks.
Japan’s economy has been hurt by a variety of factors, not least decades of deflation or falling prices. Falling prices discourage people from spending and companies from investing, and that has trapped Japan in a cycle of sluggish growth and recession. Given the slowdown in Japan’s export sector in recent years, reviving domestic demand has become ever more crucial to spurring a fresh wave of economic growth in the country. Prime Minister Shinzo Abe has also said that stoking inflation is key to boosting domestic consumption. Under pressure from the government, the central bank had doubled its inflation target to 2%, earlier this year.
The YEN fell against the US$, and Tokyo’s Nikkei 225 index rose 2.2% on the central bank’s decision, indicating markets were reacting positively to the extent of the stimulus measures.
US equity markets are slowly rolling over, yesterday some significant technical damage was done. US equity markets started to roll over. Yesterday’s technical negative action increased significantly.
Other than in wistful missives about missed public policy opportunities, economists have had little reason to speak of the virtuous circle since 2007. Yet we suspect that it will creep back into the lexicon of the financial media shortly. But if we’ve heard little of the virtuous circle, we’ve heard plenty from its evil twin, the vicious circle. Its offspring (housing collapse, rising unemployment, falling stock prices, crisis of confidence and credit crisis) were all key components of the last recession and helped contribute to the near collapse of our financial system. Yet they have all steadied and apparently found a bottom. The best leading indicator of the group, stock prices, has been climbing for four years. Credit for both households and business has started to flow more freely, even discounting for the Fed’s pump priming. While it sounds positive, the lingering concern nagging at many investors seems to be “is this all there is?” Are we stuck in the so-called “new normal” of slow growth that is well below the economy’s potential…or worse, facing a consumer spending slowdown that some fear could pull the economy back into recession?
When stocks began to peak from a substantial seasonal run that began in October of that year, the Baltic Dry index is rising as cyclicals, such as energy and materials, are weakening. The BDI provides an assessment of the price of moving the major raw materials by sea. The diverging activity of the price of shipping materials versus the price of companies valued based upon materials they produce is made without conclusion, other than the fact that underlying fundamental influences that typically drive these cyclical sectors higher at this time of year are still occurring. Manufacturing and industrial production typically increase into the Spring, driving the BDI higher as more goods are shipped, and customarily giving strength to Materials and Energy. However, the fading relative performance of these cyclical sectors suggests that investor demand to hold these stocks is clearly absent, despite the positive fundamental influences. Once again, warning signs are beginning to emerge. With AAPL still commanding a large percentage of the Nasdaq 100 , the short trade is in AAPL. Now after it completed it’s 10 % recovery from its lows of US$418, we are advising to short AAPL, with our next price target being US$ 380, then over the 9 – 12 months time period, we stick to our AAPL price target of US$ 320.
Cyprus deal done. Stocks advanced strongly on Monday morning after 11th-hour talks to save Cyprus from default resulted in a last-minute bailout deal with the Troika. Following a meeting of Eurozone finance ministers that lasted almost 12 hours, Cyprus agreed to a EUR 10 bn aid package that doesn’t include a controversial across-the-board bank-account tax but involves forcing big losses on uninsured depositors.
Cyprus is about as economically significant as the German city-state of Bremen, and yet the attention of citizens and politicians alike was focused on the debt-ridden country on the continent’s periphery last week and through the weekend. Since Cypriot parliament rejected the initial bailout plan, one crisis meeting followed the next in Berlin, Frankfurt and Brussels as concepts were presented, revised, rejected and resubmitted. In the end, the European Central Bank (ECB) imposed an ultimatum on the country. The message from ECB President Mario Draghi was that either Cyprus agrees to the bailout conditions or it could be the first member of the Eurozone to declare a national bankruptcy.
Global equity markets have had a very mixed performance so far, the question begs, is it time for the inevitable correction?
Or is there a bit more room on the upside?
If all the BRIC countries are struggling, that is a big concern. Maybe the SENSEX rallies from here. The chart above shows a very important pattern that usually identifies major tops. Taiwan and Singapore are starting to soften on the ETF’s. Most of the commodities looked like they were at a pivotal point too, be it related to the US$’s recent temporary strength. The Rest of the World dragged down the US market in 2011. If commodities, and emerging markets are not rallying from here onwards, then we see cause for a softening of US equities in a rather large move down through the summer. $COPPER would suggest the move is to the downside. US housing starts and Transports would suggest the move is to the upside.
We do not say that the trend for global equity markets has reversed, but surely a correction of 5% – 8% is not far ahead, and we are advising our clients to add towards strategic equity positions when it will occur. When looking at aggregate performance since January 1st 2012, the Nikkei 225 is up 48%. In the last three weeks alone, the Nikkei has risen 8%. Frankfurt’s Xetra Dax is second best, with a gain of 36%. The Nasdaq is next, followed by the S&P 500. Continue reading
A valuation in line with the 10-year average historic valuation of 10.3x implies a share price of EUR 88.52 at year-end 2014E and time-discounted (yield of 10-year Bund), a target price of EUR 87.24 at year-end 2013E, which is 24.6% above the current share price (EUR 70.00) and 2.7% below our previous target price of EUR 89.69 (March 12th). (See our latest company reports ‘BMW – 4Q/FY12A prel. results comment’ of March 18th and ‘BMW – 4Q/FY12E preview’ of March 12th.)
BMW shares – our view: The current BMW share price of EUR 70.00 values BMW at 8.7x 2013E prospective earnings and at 8.1x prospective 2014E earnings; the latter is a 21% discount to the 10-year average historic valuation of 10.3x. This is inconsistent with the implication that our 2014E EPS estimates (EUR 8.63) are 11% above FY12’s record EUR 7.77 and 100% higher than the 10-yr average (EUR 4.31). (See pp.11-12.) Continue reading
The energy sector was buoyed by a breakout in natural gas prices. Natural gas prices surged by 3.59% to US$ 3.812 mBTU’s after the Energy Information Administration reported that inventories fell by 145bn cubic feet last week, 18.5% below the same level last year. The consensus estimate was for a 137bn cubic-feet fall. Nat Gas prices have risen by over 9% month to date, with the market betting on a tighter supply and demand situation following a cold winter season, signs of a recovery in the US economy, a drop in drilling rigs, growing uses for the fuel, and a shift away from coal-fired plants.
In the past 6 months, we have been advising our clients to increase weightings towards equities, at the expense of reducing weightings in bonds. We repeatedly have reiterated this call, in the face of many other strategists who have called for a major 7% – 10 % correction for equities since late January 2013.
Several short term technical aspects are showing further evidence that this outperformance for equities might continue, well into the seasonal period of weakness starting in May, “Sell in May & Go Away”, when particularly European Balanced Fund managers are switching from particularly high-yielding equities, which are paying their annual dividends (unlike the US and UK corporates which are paying quarterly dividends) from late February – late June. Continue reading
BMW shares – our view: The current BMW share price of EUR 72.65 values BMW shares at 9.0x 2013E prospective earnings and at 8.4x prospective 2014E earnings; the latter is a 20% discount to the 10-year average historic valuation of 10.5x. This is inconsistent with the implication that our 2014E EPS estimates of EUR 8.63 are 16% above 2011’s record EUR 7.45, 74% higher than the 5-year average of EUR 4.97 and 123% higher than the 10-year average of EUR 3.87. (See pp. 21-22.)
Weekly Investment Conclusion:
Strength in US equity markets last week triggered by surprising strength in economic indicators was unexpected. US equity markets quickly regained short term momentum. Positive psychology related to the Dow Industrials reaching all-time highs also helped. This week, economic data is expected to be positive again and the S&P 500 Index (a more significant US equity index) will have a chance of reaching its all-time high at 1,576.09, despite short and intermediate technical indicators once again have returned to overbought levels.
Selected sectors with favorable seasonality at this time of year remain attractive purchases candidates on weakness. The trigger could be a rollover of the US$ from a highly overbought level. When it happens, and we do think this will happen within days, commodity stocks including metals & mining, energy, coal and steel stocks will come alive. All recorded exceptional gains on Thursday and Friday.
More support for global equities due to slowly but gradually improving global economic expectations and economic outlook.
GDP in the Euro area as a whole, we think might surprise on the upside and are expecting a +0.2% GDP number for 2013, and +1.0% GDP for 2014, as we are seeing more evidence of government policies in Europe, but also around the world starting to make progress, and hence why we are expecting for global GDP growth to accelerate in 2014, albeit slowly for Europe, the UK, the US, but more rapidly in Japan, China, India, Africa, Brazil, Russia and emerging economies like the Philippines, Thailand, Turkey, Poland. Continue reading
So, whilst we are expecting for volatility in Latin American markets to increase, our favorite markets for investors to increase weightings in equities are: …… Continue reading
We still see the current US$ temporary strength as a good opportunity for investors to increase equity holding in international companies. The current temporary strength of the US$ and its inverse impact on global commodities prices as a good opportunity for US institutional investors to increase their weightings in foreign equities and commodities, and particularly to those benefiting from a seasonality point of strength, we advise investors to add towards the following equity markets and sectors: …..
The Euro is in oversold territory. We expect the Euro to reverse it’s latest weakness, as the “Italian Job” damage is done, and investors will focus on the macro aspects which matter most at this stage.
The current temporary Euro-weakness has enabled European governments and corporates to initiate hedging positions for the next 18 months, which will ensure their global competitiveness, and so we are advising investors to buy the Euro at the current levels of 1.30. We maintain our 3 – 6 months price target for the Euro at EUR/US$ 1.38. The Euro typically enters a period of strength form April – July.
Historically, the month of March has appositive seasonal bias for US and global equities’ indices. March has had the fourth best seasonal impact for US equities and particularly on the S&P 500, when looking back 50 years. The Dow’s and the fifth best performing month for the Dow Jones Industrial Average and the eighth best performing month for the NASDAQ Composite. Average gains per period were 1.1% for the S&P 500 Index and Dow Jones Industrial Average and 0.6% for the NASDAQ Composite. Most of the gains were recorded in the second half of the month.
We think that for 2013, March will be another strong month, ahead of the seasonal “Sell in May & Go Away” phenomenon.
5 pictures worth more than 5 Million words.
We thought that today, we create value, not only on a serious note, but also by realistically looking at the “value added “ perception and reality of most of the “sell-side” content to institutional investors. Here we give clients a bit of guesswork to enjoy, which we think is fun, and explaining how that some deliver value, or alpha, and most do not. The majority of sell-side analysts have been bullish on one of these two securities.
We take an indepth look at EADS and Boeing.
SES SA 2012 results were on top of expectations, and the management is guiding expectations higher for 2013, particularly, due to declining Capex and increasing free cash flow, and that not only for 2013, but also for 2014 and 2015. The proposed increased dividend comes in at EUR 0.97 (versus EUR 0.88 in 2011) and is as expected, and will offer investors a high yield of 4.2% annually. This high yielding stock, combined with solid top-line growth ad earnings growth, and a visibly declining capital expenditure program for the next three years, makes SES shares attractive for investors in our opinion.
SES SA, the growing global industry leader in the global satellite and communications market is in our opinion a good investment for global institutional investors, looking to achieve an above average total return with minimal investment risk, and with limited management execution risk. Our 12-month price target for SES SA shares is EUR 30.
Weekly Investment Conclusion: The current, and shallow correction between now and the end of March will provide investors with an opportunity to accumulate sectors on weakness that have a history of seasonal outperformance until the traditional “Sell in May & Go Away” period, which may start this year, again like in 2012, ahead of its usual acclaimed season. Last year, we did forecast the “Sell in May & Go Away” equities peak correctly as of April 2nd.
In January, the global light vehicle markets grew 12.0% yoy, after having advanced 1.3% yoy in December and 5.2% to 80.89m in FY12, according to LMC Automotive. The SAAR (seasonally adjusted annualised rate) of sales hit a record level of 85.91m units/year in January, 4.4% higher than December’s 82.31m. In FY13E, the global LVs markets are expected to decelerate sharply and grow just 2.7% to 83.0m, in line with our previous forecast. (See GADA January 2013 edition of January 23rd, 2013.)
European Economic Outlook for 2013. Clearly, …………………………………………………more mixed macro news ahead.
We see technical evidence for the long-term bullish trend to remain intact until there are greater odds of a looming recession. Or until stocks become overvalued. Neither is a real concern right now. Not even with the government cost cuts from the sequester going through post March 1st.
So, we are recommending to add towards Asian, and European equities if, and when the correction increases in velocity.
Apple stock continues to look for a lower price. The gap down from January is a major sign of more selling volume to possibly join the carnage in the once biggest stock in the world. Shares of Apple have not moved above its 50-day moving average since September of last year, precisely when the new iPhone and iPad were launched.
We maintain our “Sell/Short” recommendation on AAPL, with our 3 – 6 months price target of US$ 320.
We continue to see one good investment solution to the problem of global currency wars: Investors should continue to buy Gold.
We have been recommending for 3 years to “sell/short” the French OEM’s and also Fiat, in Italy, which in retrospect clearly was an alpha generating call for investors over the entire time period.
Given recent macro-dynamic changes, in monetary policies, impacting currency markets around the world, namely the Yen weakening substantially versus most currencies, particularly the US$, the EURO, but also mostly against the Korean Won, we have become bullish in September 2012 on Japanese stocks, calling for a major rise in the Nikkei, and implicitly seeing a bullish case in favor of Japanese car companies.
The attached report is an update on APPL stock, following our original “Sell/Short” note from October 3rd, 2012 to our clients.
After a report by James Stewart, NYTimes this past Friday Feb. 8th, 2013 in his “Common Sense” Column, “Following a Herd of Bulls on Apple”http://www.nytimes.com/2013/02/09/business/following-a-herd-of-bulls-on-apples-stock.html?pagewanted=2&_r=0&ref=business, we are reiterating our “Sell/Short” recommendation on APPL with a short-medium term (3-9 months) price target of US$ 320/share.
As we have written in the past years, most countries are artificially pushing down their exchange rates in an attempt to obtaining competitive advantages at the expense of others. And if they all manipulate their own currencies, all sides will end up losing out. At the EURO summit, as well at other Central Banker policy meetings as of late, we have heard over and over that currency wars are impacting policies and inherent competitiveness issues.
At EUR 45.45, Daimler shares are currently valued at 9.6x prospective 2013E earnings and 7.7x prospective 2014E earnings; the latter is at a 27% discount to the 5-year average historic valuation of 10.5x and at a 14% discount to the 10-year low historic valuation of 8.9x. This is inconsistent with the implication that our estimates for 2014E EPS (EUR 5.91) are 44% above the 5-year average of EUR 4.11 and 63% above the 10-year average of EUR 3.62.
A valuation in line with the 5-year average historic valuation of 10.5x implies a share price of EUR 61.90 at year-end 2014E and time-discounted (yield of 10-year Bund) a target price of EUR 60.91 at year-end 2013E, which is 34% above the current share price. (See our latest company report ‘Daimler: 4Q/FY12A operational results in line. 2013 set to be yet another ‘year of transition’ of February 11th.)
Daimler shares – our view: At EUR 45.45, Daimler shares are currently valued at 9.6x prospective 2013E earnings and 7.7x prospective 2014E earnings; the latter is at a 27% discount to the 5-year average historic valuation of 10.5x and at a 14% discount to the 10-year low historic valuation of 8.9x. This is inconsistent with the implication that our estimates for 2014E EPS (EUR 5.91) are 44% above the 5-year average of EUR 4.11 and 63% above the 10-year average of EUR 3.62. (See pp. 24-25.)
As you know we turned very bullish on Japan and China in September 2012, and have been advising to overweight allocations towards the Nikkei and the Shanghai Indices, as we recognized major turning points in those markets due to changes in government leadership and implicitly new and improved stimulus policies going into effect as of Q4 2012.
History shows that US equity markets in the year after a Presidential election move higher into the first week in February in conjunction with fourth quarter reports, weaken thereafter until the end of March and moves higher thereafter. Given political events scheduled in the US during the next two months, history is repeating. Continue reading
A more import factor, in our view, is the polarisation in demand into premium and discount brands and product that has been intact for the past 20 years and accentuated during the crisis. Driving forces have been the downsizing on the part of the premium brands and an improvement in quality of discount brands. As a result the mainstream brands such as GM’s Opel/Vauxhall, Ford and local champions such as Peugeot, Citroën and Fiat have lost ground.
See also our monthly publication ‘Global Automotive Demand Atlas’ p.8. We published the January edition on January 23rd. Continue reading
Global Equity Markets, what next? Overheated? Or much more to go? While funds continue to flow into stocks, as we were forecasting since mid-December, money continues to move away from the bond market; particularly treasuries that have seen yields spike almost 400 basis points since the start of December.
Treasury yields have broken firmly above a long-term declining trend line that had remained intact for almost two years, diverging from the positive trend of equity markets over the same period.
We see the LTRO repayments likely to boost money-market rates, leading to more EUR/US$ strength in the near term. The EURO extended a gain versus the US$ to trade as high as EUR/US$1.3464, extending an 11-month high set earlier in the session. We maintain our Q1 price target of EUR/US$ 1.3850. Continue reading
APPLE (NASDAQ AAPL US$ 469 pre-open ind.) We maintain our 3 – 6 months price target for AAPL at US$ 380.
We had a few interesting phone calls over the past 2 months from some clients, but also news reporters, and other critics, who used to receive our research, and/or download it from Bloomberg, but who do not pay us for our services, however, have put a lot of emphasis on taking the time and read and battle our forecasts and research, particularly as of late related to Apple and our call on October 2nd, to “sell/short” the beloved stock.
Let’s look at the facts, since then, we correctly predicted AAPL to fall from then US$ 685 to US$ 520, based initially on chart technical outlook changing. Then, when AAPL hit our price target of US$ 520, we wrote in several daily reports, besides updates on Apple, that we were expecting AAPL to recover back towards US$ 585, which it subsequently did within the ten days after our US$ 585 target call.
On December 5th, we reiterated our initial call, which was based in part on chart technical traditional Fibonacci basics, but also complementing the chart technical aspects with market research and looking at the dynamics that existed for AAPL’s most direct competitors, Nokia, Samsung, Sony, and considering all of our combined research, and logical sense, that AAPL’s investors euphoria had been fading.
In December, the global light vehicle markets grew 1.3% yoy, after having advanced 4.3% in November, resulting in a 5.2% increase to 80.89m in FY12, according to LMC Automotive. The SAAR (seasonally adjusted annualised rate) of sales declined somewhat to 82.31m units/year in December, from 83.03m units/year in November, though was better than in October and September. In 2013E, the global LVs markets are expected to decelerate sharply and grow just 2.3% to 82.73m, in line with our previous forecast. (See GADA December 2012 edition of December 19th, 2012.) Continue reading
Time for a pause for global equities? The S&P 500 has posted gains in each of the past five sessions, pushing the large cap index well into overbought territory. Being overbought doesn’t necessarily conclude the positive trend, particularly on a longer-term time scale, but it does increase the probability of buyer exhaustion, leading into a retracement of some magnitude to follow. The S&P 500 Index is presently testing the upper limit of the rising trend channel that has been in place since the mid-November low. Relative Strength Index for the S&P 500 is now surpassing 70. Continue reading
FORD (NYSE: F US$ 10.80) BUY – 6 Months Price Target US$14
Between 2008 and 2012, revenues fell from $143.6 billion in 2008 to an estimated $130 billion this year. The company took $14.8 billion in losses in 2008, but has been profitable ever since. Ford’s performance of its different operations is rapidly diverging. US quarterly profits and operating margins hit the highest level since 2000. Ford’s operating margins of 12.0% during the quarter were very strong. Strength in Ford’s core business was offset by weakness in Latin America and continuing problems in Europe.
Two unexpected events last week triggered a surprising upside move in equity markets last week, China’s $150 billion fiscal stimulus package announced on Thursday night and the ADP report showing a gain in US private employment in August instead of a loss. Gains were muted on Friday when the less than expected US employment report was released.
Bull or Bear? and European Nuclear Power Plant Problems
The weekly chart below of the Dow Jones Industrial Average over the past few years shows a massive rising wedge formation, which has severe bearish implications should the price action break below the lower limit of this pattern. Given the easy money policy in the US and other parts of the world, a certain amount of skepticism of the bearish implications is warranted. However, the merit of this pattern is supported by a negative momentum divergence over the same period.
End of Q3
Now will there be a final spurt in Q4 2012?
We had the privilege to visit with some of Germany’s top corporate managements last week in Munich, plus get a glimpse at the Oktoberfest, where we were on a fact-finding mission with clients to assess the state of mind of the German corporate executives and that of the overall German consumer.
– Europe, US, Japan, Korea & India OEMs Valuations
– Global Truck Manufactures Valuations
Inflation adjusted gasoline prices in the US have soared in the past four months. The inflation-adjusted price for a gallon of unleaded is up over $0.50 since the end of June and has rarely been higher than current levels.
Middle East instability (e.g. Arab spring) and Middle East tensions (e.g. Iran) are ongoing. Continue reading
Technical Market Observations & Babbage
The weakest 3-week period of the year for North American equity markets is from September 16th to October 9th. The S&P 500 has dropped an average of 2.5% during this period. The TSE Composite Index has dropped an average of 4.0% per period. The weakness is related to negative guidance (earnings confession season) and analyst estimate reductions/downgrades during this period prior to release of third quarter results.
2012 so far:……
Discussions have been going on for some time, in Berlin and, most of all, Brussels, to proceed to split up “Mega-Banks”. The European Commissioner for Internal Market and Services, Michel Barnier, a former French cabinet minister with snow-white hair, is the most feared of the Brussels commissioners in European financial centers. He is already responsible for more than 30 EU regulations decreeing how banks and other financial market players are to do business in the future.
The Federal Reserve’s decision on Thursday to proceed with QE3 + was not a surprise to us, albeit for most of the market participants, and equity markets responded accordingly. Volume gains on Thursday and Friday were impressive. Additional follow through early this week is likely. However, news from the Fed came at a time when equity markets already were significantly overbought based on short and intermediate technical indicators. Technical action on Friday was an interesting “tell”. Equity markets moved higher at the open, dropped close to break-even just before the close and closed strong on end-of-day buy orders. Not an impressive follow through!
The weakest three week period of the year starts this week. The period is related to pre-third quarter earnings report news. The next three-week period historically is when negative guidance is most frequently released by corporations and when analysts reduce estimates and recommendations. The frequency of negative guidance since release of second quarter results has been unusually high this year. We see evidence of history to repeat during the next three weeks.
“Saved by the bell” “Temporary Euro Relief”
The Federal Constitutional Court has rejected a petition to stop the ratification of the permanent euro rescue fund, the European Stability Mechanism. The decision clears the way for the ESM to go into effect. In a historically significant signal for the Euro rescue, the German Federal Constitutional Court on Wednesday ruled there are no grounds to stop the country from ratifying the European Stability Mechanism, the permanent euro bailout fund. However, the justices expressed some reservations.
Weekly Investment Conclusion:
Downside risk exceeds upside potential in equity markets during the next six weeks.The breakout by the S&P 500 Index last week implies that depth of the downside risk is less than previous. Selected seasonal trades continue on the upside (gold, energy, software) and downside (transportation). However, many of these seasonal trades reach the end of their period of seasonal strength this month. September is a month of transition.
So Mr. Bernanke, Ready for a run down Corbett’s Couloir?
Following on from last week’s peak of the Federal Reserve Chairman Ben Bernanke’s closely watched speech at the Jackson Hole symposium, markets widely believe that further quantitative easing (QE) is now on the cards for the central bank’s next meeting on September 13th and 14th.
Mercedes-Benz Cars keeps driving earnings upgrade FY10E-12E. Earnings upgrade for FY10E. Our view: At EUR 48.40, Daimler shares are currently valued at 7.9x prospective 2012E earnings, which is at a 32% discount to the 5-year (2004-08) low historic valuation of 11.7x and a 21% discount to the 10-year (1999-2008) low historic valuation of 10.0x. This is inconsistent with the implication that our estimates for 2012E EPS (EUR 6.12), which we do not expect to be peak earnings, are 60% above 2007’s pre- crisis EUR 3.83 and the 10-year average of EUR 3.84 and 98% above the 5-year average of EUR 3.08. (See pp. 24-25 for details.)
Our view: At EUR 44.60, Daimler shares are currently valued at 7.4x prospective 2012E earnings, which is at a 37% discount to the 5-year (2004-08) low historic valuation of 11.7x and a 26% discount to the 10-year (1999-2008) low historic valuation of 10.0x. This is inconsistent with the implication that our estimates for 2012E EPS (EUR 6.04), which we do not expect to be peak earnings, are 57% above 2007’s pre- crisis EUR 3.83 and the 10-year average of EUR 3.84 and 96% above the 5-year average of EUR 3.08. (See pp. 25-26 for details.) Our indepth report…
We are previewing 34 cars and concepts, including concepts for electric scooters by Smart and Mini ␣ There is still a lot of fun and glamour in the industry, with a number of premium products and performance cars on show both as concept and production cars.
Management under CEO Reithofer have taken a highly pro-active business approach and introduced a modular production & development strategy for future products, are accelerating the model momentum and efficiently hedging currency. This has put BMW in a position to better take advantage of external factors such as a strong global recovery in demand and pricing of premium cars, and increased volatility in the currency markets.
A valuation in line with the 10-year low historic valuation of 10.0x implies a share price of EUR 56.71 at year-end 2012E and time-discounted (yield of 10-year Bund) a target price of EUR 53.72 at year-end 2010E, which is 23.3% above the current share price. See our latest company report on Daimler of July 26th.
Disappointing order trends in 2010 indicate a flat recovery.
Our view: Following a sharp 32% increase from a 2010-low of EUR 28.75 (on February 15th) the BMW share price hit a two-year high of almost EUR 38 on April 26th. The current BMW share price of EUR 36.69 values BMW shares at 11.8x 2011E earnings, which is at a 21% premium to the 5-year average pre-crisis historic valuation of 9.8x. This is inconsistent with the implication that our 2011E EPS (EUR 3.11) are 35% below 2007’s EUR 4.78 and 17% below the pre-crisis 5-year average of EUR 3.74. (See pp.10-11 for details.)
Even a valuation in line with the 5-year average pre-crisis historic valuation of 9.8x implies a share price of EUR 30.36 at year-end 2011E and time-discounted (yield of 10-year Bund), a target price of EUR 29.46 at year-end 2010E, which is 19.7% below the current share price and 10% above the previous target price of EUR 26.77. See our latest company report on BMW of April 29th.
Daimler’s preliminary 1Q10 results: stellar performance at M-B Cars and Daimler Trucks busting FY10 guidance. Management doubled their FY10 outlook for M-B Cars to EUR 2.5-3.0bn and trebled that for Trucks to EUR 0.5-0.7bn. We raised our EPS estimates by 64% to EUR 2.74 in FY10E and by 20% to EUR 3.75 in FY11E. (Final 1Q10 results are due Tuesday, April 27th.)
Included in this report is our 2010 Macro Outlook and Beyond, GDP Commodity Price Forecasts, Equities Indices Targets covering Currency Forecasts, Global Equities Sector Outlook, Global Equities Outlook per Country and Global Equities Indices Targets.
VW announced that it plans to offer up to 65m new preferred non-voting shares, with the sale price, subscription ratio and the offer volume to be decided by March 26. VW intends to raise ‘around EUR 4bn’ in order to fund the Porsche takeover and preserve its credit rating of A- (S&P) and A3 (Moody’s). The issuance of 65m preferred shares would raise around EUR 4.5bn (based on the share price of EUR 68.65 at close March 23rd) and increase the existing number of shares (295m ordinary and 105.24m preferred) by 16%.
Market Commentary covering US Economic Concerns, US unemployment, European Economic Concerns, Currencies Commentary and Outlook.
We are reiterating our “Buy” recommendation on Veolia Environnement at a current price of EUR 24.38. Our 3 – 6 months VE price target is EUR 30 per share.
FY09E earnings at EUR 151m/EUR 0.24 per share. We expect that in FY09E, an already announced 4.7% decline in group revenue to EUR 50.68bn resulted in declines of 26% in pre-tax profit to EUR 259m/0.5% and of 53% in net profit to EUR 151m/0.3% or EUR 0.24 per share. We estimate that this was the result of an EBIT of EUR 393m/0.8% and a net financial charge of EUR -134m. (See pp.2, 4-6 for details.)
Our view: The current VW preferred share price of EUR 59.93 is in line with the YE09 price and values VW preferred shares at 8x prospective 2011E earnings which is at a 15% discount to the 5-year average historic valuation of 9.4x. This is inconsistent with the implication that our 2011 EPS (EUR 7.52) estimates are 15% above the 5-year average of EUR 6.55. (See pp.6-7 for details.)
We see the current EURO weakness, and implicit US$ strength as a tremendous opportunity to add towards EU quality assets, and inversely, to reducing US assets, as we expect the US$ weakness to resume later in 2010. Please read our in-depth report on the US Economy , Chinese Economy, Japan’s Economy, European Economies, Emerging Economies, Currencies, Global Equity Markets and Commodities.
Daimler’s 4Q/FY09 results: M-B Cars and Vans surprised on the upside. We confirm our view of an EPS recovery to EUR 1.67 in FY10E and EUR 3.38 in FY11E.
Daimler 4Q/FY09 provisional results comment: Group EBIT slightly down qoq despite greater than expected margin improvement at M-B Cars and M-B Vans. Decision to pay no dividend for 2009 does not reflect on FY10 outlook and is actually shareholder friendly, according to management. M-B Cars generated a 4Q09 EBIT of EUR 608m and a 5.3% margin. Management guidance for FY10 is a group EBIT in excess of EUR 2.3bn driven by M-B cars and Trucks. Conservative assumptions regarding market developments, in particular at trucks, point towards the guidance being a floor, in our view.
We expect that Daimler which turned profitable again in 3Q09, will report further improvements in group profits at all levels in 4Q09E; a 18.5% qoq improvement in EBIT to EUR 557m/2.5% (from EUR 470m/2.4% in 3Q09), a 37% qoq increase in pre-tax profit to EUR 393m/1.8% and a net income of EUR 350m.
The current BMW share price of EUR 32.19 is 11% down from its 2009 peak of EUR 36.14 (October 23rd) and up 12% from a 2010-low of EUR 28.75 (on February 15th). This values BMW shares at 11.4x 2011E earnings, which is at a 17% premium to the 5-year average pre-crisis historic valuation of 9.8x. This is inconsistent with the implication that our 2011E EPS (EUR 2.85) are 40.5% below 2007’s EUR 4.78 and 23.9% below the pre-crisis 5-year average of EUR 3.74.
Renault – 2H/FY09 results highlight competitive weakness and excellence in cost-cutting: Group net loss narrowed in 2H09, but worse than consensus. Auto division close to break-even in 2H09, as stringent cost cuts and efficiency gains accompany a recovery in sales. Mix and price remain a worry. Efficiency gains in WC management were crucial for increasing FCF in 2H09. No earnings guidance for 2010, but commitment to positive FCF.
PSA – 2H09/FY09 results uninspiring: Auto division reported a reduced EUR 353m operating loss in 2H09, worse than our expectation. Positives factors, higher volumes (production and sales) and cost cuts were outdone by negative pricing, mix and currency. Group net loss/share is EUR 5.12 for FY09, vs. our estimate of EUR 4.71. Management declined to give an earning guidance for FY10, and committed only to a positive group recurring operating result for 1H10.
ArcelorMittal swung to a fourth-quarter profit from a year-earlier loss on 16% lower sales. ArcelorMittal said it earned $1.07 billion after losing $2.63 billion in the prior-year quarter, when it took a $4.4 billion hit from writing down inventory and raw-material- supply contracts as well as provisions for workforce-reduction litigation.
Mr. Trichet has an opportunity to help Greece to join the Modern Era. As we have been warning investors since November 2009 about the “Sovereign Risks” that would impact currencies, bonds and equities in 2010, we believe that now the risks seem to be fully taken into valuation accounts for the three asset classes.
We do believe that the problems for Toyota will continue to get worse, and in fact are deeper than what has surfaced to date. We are reiterating our Sell Recommendation on Toyota Motors Corp.
Management expect a positive pre-tax result for 2009. Decline in group revenue led by the Auto division. We confirm our FY10E- FY11E estimates: recovery in sales and earnings.
The Daimler share price doubled from a LT low a year ago, to EUR 36.24 currently, valuing Daimler shares at 11.1x 2011E earnings, which is at a 31% discount to the 5-year average historic valuation. Our estimates imply that 2011E EPS (EUR 3.28) are 14.7% below 2007’s pre-crisis 2007’s EUR 3.83 and 6.2% above the 5-year average of EUR 3.08
We confirm our FY09E estimates of a group EBIT of EUR 393m/0.8% and earnings of EUR 0.24 per share. The Auto division is set to exit a dismal 2009 with a strong EUR 140m/1.1% in 4Q09E, leading to a negative EBIT of EUR -218m in FY09E. Higher sales, a further ramp-up in production and improving model momentum should drive the EUR 216m qoq earnings improvement in 4Q09E.
The Year of Capital Preservation?
BMW group remains at the mercy of currency, the US dollar in particular.
VW’s extraordinary general meeting (Dec. 3rd) prepared the ground for two important steps in the two-year multi-stage merger with Porsche SE: VW’s acquisition of 49.9% of Porsche AG for EUR 3.9bn cash (that took place on Dec. 7th) and a EUR 4bn capital increase in VW preferred share capital in 1H10.
BMW – 3Q09 comment. Auto division incurred deeper 3Q09 EBIT loss as de- stocking continued. Underlying FCF remained positive. Financial Services: financial risk marginally receded in 3Q09. Management confirmed its FY09 guidance of a group profit and a sales decline by 10-15%.
Our estimates imply that 2011E EPS (EUR 3.01) are 21.5% below 2007’s EUR 3.83, whereas the prospective multiple 2011E of 12.2x is 8% below the historic 2007 average valuation of 13.3x.
Albeit not cheap for a stock in a sector with many more troubles ahead, Daimler is in our opinion the best car stock in Europe, and we advise to add to positions at current prices, and particularly on a pullback in the markets…
Our view: 2010E outlook: BMW should remain unaffected from a post-incentive hang- over in 2010 and be able to benefit from any recovery in demand globally and the US specifically. We expect that this, together with an improving model momentum (introduction of the 5-Series in 2Q10E) should lead to an EBIT of EUR 1.2bn/2.9%. However, as the dependence on FS is expected to continue to grow, BMW is becoming potentially more vulnerable to any future shocks to the global financial system.
We expect a EUR 365m group operating profit/1.3% margin, considerably better than 1Q09’s EUR 313m, that included EUR 600m capital gains.
The group failed to increase market share in Europe and even lost share in France, despite an accelerating model momentum and the roll-out of several new versions of the C segment Mégane. We also detect deterioration in mix as the discount brand Dacia benefited most from government incentive schemes and saw its European sales triple in 2Q09.