We thought it worthwhile to review the earnings outlook for Boral, post the acquisition of the Headwaters Group.
In FY18 revenue grows to $6.2b, EBITDA $1b, EPS $0.38 and DPS of $0.24 placing the stock on a 4% forward yield.
We’re cautious of the risks for Boral in achieving these targets and it appears the stock is relatively full value at the current price.
Ansell has purchased Nitritex, a UK-based manufacturer of premium clean-room and healthcare Life Sciences consumables. The deal is relatively small at US$60m and will be near-term earnings accretive.
The transaction adds to income generated outside the US and extends to the Ansell’s expertise across the Life Sciences segment.
We’re buyers of Ansell on the current price pullback. Value exists in the $22.50 – $23.50 range.
FY17 revenue $1.65b, EBITDA of $285m, net profit $170m, EPS $1.10 and DPS $0.46 places the stock on 2.5% forward yield.
We expect underlying business growth into FY18 and FY19 of 6% – 9%.
European economic growth for 2016 rose to 1.7%. Inflation is running at 1.8%, which is nearing the ECB’s target of 2% and the jobless rate fell to 9.6%; the lowest figure since May 2009.
This is the first time since 2008 that we’ve seen EU growth prospects tracking near the rate of the US. By any comparison, the economic recovery in G7 countries is still at very low levels and fragile global conditions remain.
Equity market valuations are stretched, and subdued revenue growth will likely lead to analysts’ EPS targets being reduced by 50% for 2017 to reflect actual current growth rates.
Our Algo Engine triggered a short signal in the iShares Europe ETF back in May at $55.75 and the index collapse by 18% within a few months following. Six months on and the index has recovered back to $52 and whilst we don’t have a new short signal present, we’re still cautious that another near term top is now in place.
Tabcorp reports earnings on the 2nd of February.
We assume Tatts merger is completed by middle of this year and generates cost savings post integration of $100m plus.
FY18 revenue $5.2b, EBIT $800m, DPS $0.25 places the stock on a forward yield of 5%.
We’re buyers of TAH at $4.70 and selling call options post the earnings result.
SHL has strengthened its German footprint with the purchase of two laboratories from Medical Laboratory Bremen for A$90 million.
The deal is EPS accretive in the first year with margin expansion & synergy gains achievable in the near term. We expect Sonic to deliver 7 – 9% EPS growth in FY17 and FY18.
FY17 revenue $5.2b, on EBIT of $920m, Net Profit $$480m, EPS of $1.20 & DPS $0.78, places the stock on a forward yield of 3.6%.
We like Sonic as a core portfolio position, however the low yield and moderate EPS growth encourages the use of a covered call to enhance the cash flow and boost the overall investment return.
Goldman Sachs was down 2.5% overnight and was among the worst performers within the Dow Jones index of 30 companies. We see support at $230 and resistance at $245. As a gauge to the likely direction of US financials over the March quarter, we think it’s worth keeping an eye on the directional break of Goldman Sachs trading range.
We’re also watching the negative lead from General Electric as the stock trades 10% below the recent high formed on the 20th of December.
S&P500 earnings need to grow by 10 – 12% over the next 12 months to support the Dow Jones at 20,000. If average EPS tracks at the same rate achieved in 2014, 2015 & 2016, of approximately $120 per share, an argument could be made that the true value for the Dow Jones sits back at 16,500 to 18,000.
US Gross Domestic Product (GDP) for the forth quarter of 2016 came in at 1.9%, reinforcing the stagnation in the US economy.
The December quarter GDP is the fifth out of the past six quarters where GDP has come in under 2%. This may help to explain why US companies are struggling to grow top line revenue.
We’re about two thirds through the reporting season for S&P500 companies, so far earnings appear to be growing at around 6%, which is 50% below the markets bullish expectations for 2017.
Looking ahead, we remain cautious of both the March GDP reading and in particular, the S&P500 March quarter earnings, (reported in April).
An area of concern when we get to the March numbers will be the US financials. The large jump in earnings among leading US trading firms in the December quarter from bond trading, will unlikely be repeatable in the March numbers.
Bond volatility in the March quarter will probably be less than December, therefore, resulting in lower levels of trading income. Furthermore, we’re beginning to see signs that mortgage repricing is starting to negatively impact housing starts. This was evident in the December new home starts data, which showed a 10% fall.
With the USD struggling to move higher as 10-year bond yields move back over 2.50%, some market commentators are calling the USD rally over. We don’t necessarily agree with that assessment but we do recognize that the USD/10-year yield correlation has changed.
The first few days of the Trump administration has been received by the FX market with a mix of relief and fatigue. The lack of follow through on his more aggressive campaign proposals in the area of international trade has been a source of relief.
At the same time, the FX market has traded in a less sensitive pattern to the lack of consistency amongst the views of top administration officials with regard to the USD policy. The net result of the mix of fatigue and relief has been a broad unwinding of bullish USD positions and higher volatility across the major FX pairs.
Although the USD policy hasn’t been discussed directly, it seems the new administration is willing to talk the USD down. This lingering political risk in the USD has seen a rapid breakdown in the percentage correlation between the USD and 10-year yields.
On November 1st, the directional correlation between the USD and the US 10-year yield was 93%. This means that the USD was moving higher as US yields moved higher on a 93% correlation. However, as of this Tuesday, this correlation has dropped to just under 50%.
It’s difficult to determine how long this condition might last. Considering two of the biggest current drivers in the FX market are policy comments from the new administration (which aren’t scheduled) and the steady increase in US equity prices, which seem to be moving further into over-valued territory.
It seems reasonable to expect in the near-term that US equity prices will correct from the recent all-time highs and 10-year yields to find some resistance in the 2.60% area. In this case, the directional impact in the USD would be a bit clearer to map. In general, when the market moves into a “risk-off” phase, the USD will firm against all G-7 pairs except the JPY.
The two key data points in the US today will be the Durable Good orders and Advanced GDP. Both of these data sets have the potential to rattle the market if they print wide of expectations. Between the two, we believe the risk with the GDP number is asymmetrical to the downside. In other words, the “risk-off” trade will be greater on a weaker print than the “risk-on” impact of as better report.
The XJO has bounced off Monday’s low of 5600 points. A combination of the US indices trading modestly higher and the short term oversold conditions in the Australian banks, lead to the minor rally in the XJO. However, with relatively weak top line revenue growth in the US, we still remain cautious on the expected price action in the week ahead.
A break above 5830 will be bullish and a rollover in price around 5750 followed by a later break of the 5600 support will be quite negative.
Our Algo Engine flagged a short signal in Verizon at $55 on the 5th of January. The stock in now off 10% and it was the largest move to the downside within the Dow Jones top 30 stocks in the overnight session.
Level 17 Chifley Tower
2 Chifley Square
Sydney, NSW 2000
1300 614 002
Investor Signals Pty Ltd
ABN 44 143 555 453