On February 13th, Amcor will report profits for the July – Dec 2016 period. We’re looking for the net profit to beat market consensus of $300m.
AMC trades on 17x PE and 4.2% forward yield.
We hold Amcor in our investor model and have been aggressive with selling the covered call strategy. Whilst we like the defensive qualities of the business, it’s at the top end of our valuation range.
Through adding the covered call option we’re generating 10% cash-flow from the dividend and option premium.
BHP will release its 2Q FY17 production report tomorrow. We anticipate the strength in iron ore, coal and copper will likely see production tracking in-line with FY17 guidance.
The forecast for FY17 revenue of US$40b and net profit of $6.8b should generate an EPS of $1.25, which will place the stock on a 3.3% forward yield.
We remain long BHP with covered call options at or near $28 into April/May as our preferred strategy.
As an update to our ETF Watch segment on the blog, the below chart of the BBOZ ETF, (XJO x2 inverse), reflects the inverse correlation between the XJO and this product. Whilst the XJO has traded lower, the BBOZ ETF has rallied almost 10% since the 9th of January.
After an 8 year bull market we’re becoming increasingly concerned about equity valuations over the next 3 to 12 month. There are concerning signs in markets and these are starting to show up in the charts.
Many large-cap US stocks are showing a “rolling-over” style technical pattern. Following GE’s earnings result last week, along with recent Chinese export data, we’re getting a sense that risks are building.
We’ve used the recent rally in banks as an opportunity to take profits and re balance portfolio’s towards defensive names. We’re also adding short exposure through index ETF’s over the XJO and S&P500.
BXB released a 1H17 trading update which included an FY17 profit warning.
BXB announced that it expects 1H17 constant currency sales and underlying profit growth of only 3%, down from previous forecast of 7 – 10%.
North America Pallets were impacted by both revenue and cost pressures.
We’ve been concerned about BXB’s high PE valuation and low compressed yield. To protect against the risks, we hedged BXB by approximately 5%, whilst keeping exposure to the upcoming dividend.
At $10.00 we think BXB is a new counter trend buying opportunity and any short exposure or hedging should be closed and new long positions established.
We’ll keep you informed via the blog when this change in directional strategy occurs.
Here is a list of the first group of companies reporting where we’ll be reviewing the earnings results and keeping you informed….
Resmed 24th Jan – Expecting better numbers following distributor de-stocking in the September quarter. New mask release should boost sales.
Tabcorp 2 Feb – Too early for any benefit from the Tatts acquisition, however, we’re looking for commentary on forecasts and cost savings.
James Hardie 2 Feb – US building cycle remains strong but we’re now cautious on James Hardie based on valuation concerns. Need to see EPS growth of 15%+
Transurban 7 Feb – We’re expecting strong free cash flow and minor dividend upgrades.
CIMIC 8 Feb – Expecting solid growth numbers and commentary on the integration outlook of UGL following the recent take-over
RIO 8 Feb – Good production numbers and we expect earnings to meet consensus forecast.
AGL 9 Feb – We’re concerned the market is too optimistic here and we will be looking at this result closely.
AMP 9 Feb – After the downgrades from the under-performing life insurance, we question what the future earnings look like. AMP as an asset manager is a very attractive business, we just need to re-establish the expected EPS growth rate.
Amcor 13 Feb – Looking for confirmation of 8% EPS growth
Ansell 13 Feb – FX impact could be a minor negative but the underlying business is improving. We’re looking for detail and timing on the pending corporate restructure strategy.
Woodside reported DecQ16 Production above market estimates on stronger LNG production. The result was driven by a stronger-than-expected performance from North-West Shelf & Pluto LNG.
The production beat helped DecQ16 revenue which increased to US$1 billion
CY17 production guidance will see volumes down 5- 10%. This is mainly due to the reduction in Woodside’s share of the NWS Joint venture.
2017 forecast revenue US$3.9b (flat on previous year), EBIT of US$1.5b, net profit of US$1b, EPS of US$1.30 places the stock on a forward yield of 4%.
An inverse index ETF is an Exchanged Traded Fund which increases in value when the index trades lower. For portfolio hedging purposes, we use the ASX200 inverse ETF which is listed under the code BEAR. To hedge US stock exposure, we use an inverse ETF based on the S&P500.
Because of our concerns about inflated valuations in certain pockets of the global markets, we feel now is the time to draw our clients attention to these increasingly popular financial products.
Inverse ETFs are way of cost effectively hedging a portfolio and/or profiting from a move lower in Stock indexes
The market has priced in a better and brighter outlook for the Australian banks during the past 6 months.
During the middle of last year, we had off-shore hedge funds shorting our banks. Concerns about capital requirements, bad debts ticking up from one-off corporate failures and concerns about the Australian property market nearing peak prices.
Six months later and the market is thinking about better underlying conditions, reduced risk of capital raising, improving credit quality from the recovery in commodity prices and better operating margins. As a result, the valuation discount has now diminished following the 20% rally in bank names.
Our base case is that the environment has not actually changed materially from where we were 6 months ago. The news flow has turned more positive but that’s about it. The underlying issues remain the same or are intensifying, in our view.
We watch with interest the Chinese markets and in particular the risk of weaker property prices in China and the sentiment impact it will have on Australia. This is one of our key risks to Australian bank prices in 2017.
We expect low levels of credit growth due to over-leveraged household balance sheets and pressure from regulators to improve the quality of housing lending.
At best we see the banks at full value; and our most likely investment case is for further weakness driven by a pickup in global macro risk-off sentiment.
Our bank hedge into February/March remains in place and we’re expecting share prices to remain at or slightly below current prices over the coming months. The risk for further share price weakness will likely pickup towards the middle of the year.
We’re watching Facebook following the Algo Engine triggering a short signal at $128.
Facebook reports earnings on the 1st of Feb. The report will be for the Dec 2016 quarter and forecast EPS is $1.12 up from $0.59 reported the same time last year.
Chart – Facebook
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