The week ahead - Services PMIs, RBA, China inflation, BP, Vodafone and Disney results

Services PMIs (Jan) – 05/02 – The recent flash PMI numbers pointed to some significant divergence between economic activity in Europe, which appears to be slowing sharply in the bloc’s two biggest economies of Germany and France and in the UK where it rose to its highest levels since May last year at 53.8. In France service sector activity slowed to 45 from 45.7 and the lowest since September last year. In Germany we also saw a slowdown to 47.6 from 49.3 in November, increasing the pressure on the ECB to consider bringing forward the timing of its first rate cut. Economic activity in Spain and Italy has been much more resilient with December seeing Spain services activity to 51.5, while Italy saw 49.8. The US has also proved to be more resilient with both services surveys expected to see expansion of 52.9 and 51.7 for the ISM.   

RBA rate decision – 06/02 – The RBA only recently raised rates, back in November raising the cash rate to 4.35%, citing a low tolerance for any deterioration in the inflation outlook after an inflation number saw a slight overshoot. When the central bank met again in December the committee did acknowledge that while inflation was now starting to moderate in goods, services level inflation was still a concern in a trend that has been replicated globally. Governor Bullock’s stance on monetary policy appears to be being primarily driven by domestic price pressures with the RBA giving little steer that a policy change in either direction was being considered with the RBA Governor acknowledging significant uncertainties around the outlook. Expectations are for another hold in rates in line with recent slowdowns in headline inflation on both a quarterly as well as a monthly basis.  

China CPI/PPI (Jan) – 08/02 – With the economy currently seeing negative prices or deflation pressure has been growing on Chinese authorities to look at measures to try and stimulate growth as well as demand. Headline PPI has been in negative territory since October 2022, and slid as low as -5.4% in June last year, before seeing a modest rebound, however there’s been little sign that prices are even close to getting back into positive territory. Consumer price inflation has also been weak although volatility in food prices has helped lift inflation to some extent. That said the last 6-months has seen headline inflation barely manage to post a positive reading since August. In December headline CPI improved slightly to -0.3% from -0.5%, however there has been little sign in recent data of any sort of economic rebound. The Chinese central bank has relaxed reserve requirement ratios starting from the 5th February; however, it is likely it will need to do more in the coming weeks, probably after Chinese New Year which starts on 10th February. 

BP Q4 24 and FY24 – 06/02 – Last year sector peer Shell’s share price managed to put in a new record high, while BP has struggled to get anywhere near close. There are a number of reasons for this including BP having to continue to make payments in respect of its Deepwater Horizon obligations, however this isn’t the only reason. We’ve also seen a great deal of uncertainty at the top of the organisation with the departure of CEO Bernard Looney in the summer due to a failure to disclose details of past relationships with colleagues. A few weeks after Looney stepped down the boss of BP’s US operation Dave Lawler also resigned. While new CEO Murray Auchinloss was confirmed as Looney’s replacement earlier this year there appears to be growing disquiet at the current “Performing while Transforming” policy which was the part of the thrust of previous CEO Bernard Looney. While Shell CEO Wael Sarwan dispensed with the green at all costs policy of previous CEO Ben van Buerden, BP has been a lot slower in recognising that while it may tick a lot of ESG boxes, the policy itself isn’t that practical given that global demand for oil and gas remains strong. It’s a point that has been made by activist investor Bluebell Capital who called the current policy “irrational”. They aren’t wrong. In Q3 BP’s share price fell sharply after missing on Q3 profits. Last month the shares hit their lowest levels since October 2022 with the weakness in oil and gas prices over the last quarter prompting a lot of the slide. Q3 profits came in at $3.3bn, falling well short of expectations of $4.05bn. The underperformance appears to have come from its gas and low carbon energy division where profits were lower compared to Q2 at $1.25bn, while oil production and operations saw an increase from Q2, coming in at $3.13bn, although both numbers were sharply lower from the levels last year due to lower oil and gas prices. One of the reasons for the sizeable drop in profits in the gas and low carbon energy division is the decision to take a $540m charge in respect of its joint share with Equinor in a US offshore wind farm off the coast of New York. As we look towards Q4 expectations for this part of the business have been lowered due to the slide in gas prices, while the disruption in the Red Sea is expected to add to BP’s costs after it suspended its transits through the Suez Canal in December last year. In its Q4 guidance BP said it expects upstream production to be broadly flat compared to Q3, while also saying it expects to see lower volumes as well as pressure on refining margins. As mentioned earlier some shareholders are becoming restless when it comes to the “Performing while Transforming” policy which new CEO Murray Auchinloss has pledged to continue with. It remains to be seen what effect activist investor Bluebell Capital’s intervention will have after they wrote to the board saying that the pledge to reduce oil and gas production vs 2019 levels by 25% was “irrational”, given that the likes of Shell, Exxon and Chevron haven’t committed to similar pledges, and in the case of Shell have binned theirs. For now, BP has shown little sign of ditching the policy, however that could soon change if the share price continues to underperform, and management fail to deliver decent returns.     

Vodafone Q3 24 – 05/02 – Last year saw the Vodafone share price slide below its 2002 lows to trade at levels last seen in the late 1990’s as investors hung up on new CEO Margherita Della Valle’s plans to turn the ailing business around. We have seen a modest rebound since the lows back in December after it was reported that the Iliad bid for its Italian business was back on the cards almost 2 years after Vodafone rejected a similar €11bn bid for the same business, arguing that the bid was too low. The latest bid was for €10.5bn with an option that Vodafone would get 50% of the share capital in the new company along with a €6.5bn cash payment. Vodafone has been looking at options for its Italian business for some time now with very little interest from anyone else apart from Iliad, and yet Vodafone has once again decided to reject this offer, making one wonder what their strategy actually is when it comes to its underperforming Italian business. The company had already secured a deal earlier in the last quarter to sell its Spanish business to Zegona for €5bn, as new CEO Della Valle looks to focus on its UK business. Earlier this year Vodafone announced a 10-year deal with Microsoft to integrate generative AI into its services to its 300m customers. The deal will cost $1.5bn with Vodafone looking to incorporate AI solutions into its services while Microsoft will use Vodafone’s fixed and mobile connectivity services. For Q3 total revenue is expected to come in at €11.1bn, down from last year’s €11.6bn, with most of the weakness coming from its Spanish and Italian businesses. The UK and Germany businesses are expected to see a modest improvement from last year at €1.8bn and €3.35bn respectively.   

Unilever FY 23 – 08/02 – Unilever shares have underperformed over the last 12 months, down over 10% from their 2023 peaks, the shares hit 18-month lows last month. The share price weakness appears to be being driven on concerns over its margins as consumers become ever more price sensitive, and supermarket own brands become more popular, and the problems in the Red Sea add to its costs. The company has been able to raise prices but not perhaps by as much as they would like, and is losing market share as a result. In Q3 the company reported a 5.2% rise in Q3 underlying sales growth of €15.2bn, although volumes declined by 0.6%. The company kept its full year guidance of underlying full year sales growth of above 5% unchanged, while also announcing it would be selling Dollar Shave Club, although it would be retaining a 35% minority shareholding. New CEO Hein Schumacher will come under pressure to arrest the slide in the share price with further measures to protect shareholder value. There is already an uneasy alliance with Ben & Jerrys management due to the latter’s political activism and which could perhaps translate into a decision to offload the business. Unilever has been losing market share across all of its business areas including ice cream, which saw a 141bps decline in Q3, and recent share buybacks haven’t arrested the share price declines. 

Uber Q4 23 – 07/02 – The turnaround in the Uber share price in the last 12 months has been slow and steady, the shares have more than doubled in that time, posting a record high last month in the hope that the business can return an annual profit for the first time in its history. Last year saw losses of $4.65, or $9.1bn. Last year full year revenues came in at $31.8bn and this is expected to increase to between $36.5bn and $37.5bn, while adjusted EBITDA is expected to come in between $1.18bn and $1.24bn. For Q4 revenues are expected to rise $9.78bn, with total gross bookings expected to increase to $37.1bn with mobility forecast to see $19bn and delivery at $16.7bn. In Q3 revenues rose 11% to $9.3bn, while also reporting a quarterly profit of $394m. Gross bookings saw a sizeable rise of 21%, to $35.28bn. Q4 profits are expected to come in slightly lower from last year at 17c a share, pushing full year profit to 39c a share. 

Disney Q1 24 – 07/02 – The last few months has seen the Disney share price post a modest rebound from the 9-year lows of $79 we saw back in October last year. When the company reported at the end of last fiscal year there was increasing concern as to how returning CEO Bob Iger would be able to reduce losses on its streaming business, as well looking to cut costs across other areas of its business, particularly in administration roles. Under previous management the focus had been on boosting subscriptions to the exclusion of profitability in the hope that the company’s bigger brand could squeeze Netflix’s markets share. The failure to achieve this has prompted Iger, to focus on prices and this increase in prices has prompted sharp declines in subscription numbers in stark contrast to Netflix which has continued to grow its subscriber base. After losing a combined 15.7m subscribers in Q2 and Q3 Disney managed to stop the bleeding in Q4, by adding over 3.5m new subscribers pushing the total back above 150m, and revenues up to $5bn. Losses in the streaming business slowed to $387m a significant improvement on the $1.4bn loss seen the previous year, helped by the likes of Guardians of the Galaxy 3, and the new Star Wars series Ahsoka. Q4 revenues came in at $21.24bn and profits came in at 82c a share. The parks business saw a 13% increase in revenue to $8.16bn due to an increase in ticket prices and higher attendance however higher costs are also proving to be a challenge. In response Iger committed to cutting another $2bn worth of costs taking the total reductions up to $7.5bn. For Q1 revenues are expected to come in at $23.8bn and profits of $1 a share. Net adds for subscribers are forecast to see a modest increase of 310k.

Palantir Technologies Q4 23 – 05/02 – Palantir shares performed strongly last year with its AI and government business helping to deliver a strong performance. In Q3 the business reported revenues of $558.2m and profits of 7c a share, while posting Q4 revenue guidance of $599m to $603.2m and full year revenue of $2.22bn, driven by demand for AI. This guidance helped to push the shares up to 2-year highs in November last year, although we’ve since slipped back. While the company is heavily reliant on US government contracts it has managed to reduce some of that dependency to below 50%, but needs to do more to improve profitability and diversify its revenue streams. The company has been developing its AI solutions with further upside possible if the company gets included in the S&P500 after CEO Alex Karp said the company is now eligible to join the main US blue-chip index.

ARM Holdings Q3 24 – 07/02 – The early performance of the ARM share price saw the shares close their first day of trading at $63 a share, slipping back to below $50 a share in the lead-up to their Q2 results back in November. When the company came to market its Q1 figures showed a -$65.5m loss. In Q2 revenues came in much better than forecast at $806m, well above the $745m consensus, while profits came in at 36c a share, although on a net basis the company slid to a loss of $110m due to a $500m in costs and compensation related to the IPO. For Q3 ARM’s guidance was disappointing, projecting sales of between $720m and $800m and earnings of between 21c and 28c a share, sending the shares sharply lower. This decline didn’t last with the shares enjoying a solid rebound before trading at record highs just shy of $80 in January. ARM generates most of its revenues from licensing its IP to mobile device and other electronic device sales which means its revenue is largely dependent on the ebb and flow of the broader economy, although the development of AI chips could also help its growth potential given that the likes of Alphabet and Nvidia are using ARM IP to develop their AI chips.