The week ahead - UK and Germany Q1 GDP, US and China retail sales, Vodafone, Aston Martin and Balfour Beatty earnings

UK Q1 GDP – 13/05 – there is little doubt that the UK economy is likely to contract in Q1 if the recent GDP numbers from other European countries are any guide. Even though full lockdown only happened towards the end of March, and there was a decent rebound in economic activity in January and February after the Conservative Party’s surprise landslide election in December, we are still likely to see a negative number. This is due to a combination of the effects of February flooding, and rising uncertainty seen in the lead up to lockdown, as headlines of the horrendous death toll of Covid-19 across Europe started to hit our TV screens. This combined spill over of events saw retail sales in March post a decline of 5.1 %, while service sector activity hit 34.5, a record low at the time until April beat that with a reading of 12.3.  

Germany Q1 GDP – 15/05.- having seen large contractions in economic activity in most of its key trading partners it seems unlikely that the German economy will be able to avoid a significant contraction in Q1. The March lockdown, like it has in neighbouring economies, is expected to hit economic activity hard, while the shutdown in China during February saw most trade between the two countries virtually grind to a halt. Combined with the slide in economic activity in March and a huge 5.6% plunge in retail sales, the biggest in 20 years, its highly likely we could see a 3.5% to 4% contraction in Q1.

US Retail Sales (Apr) – 15/05 – despite the US economy being late in locking down its economy in March, retail sales still fell a record 8.7% during that month, as millions of Americans were suddenly thrown out of work in the last two weeks of the month. The collapse in services sector activity has decimated the US economy over the last seven weeks with a decade of jobs growth wiped out in a matter of weeks. This has seen unemployment spike sharply from 3.8% to almost 20% in fairly short order and wiped out personal spending in the process. April retail sales are likely to hit a new record low of -10%, as the full effects of the virus shutter huge swathes of the US economy.

China Industrial Production/ Retail Sales (Apr) – 15/05 – having been locked down in February economic activity in the world’s second biggest economy has struggled to recover since then with the Chinese economy contracting by 6% in Q1. Since the economy reopened there has been little evidence that the Chinese consumer has felt inclined to reopen their wallets after retail sales in the last two months saw declines of 20.5% and 15.8% in February and March respectively. The April numbers should be better; however, they are still expected to show a decline of 5.8%. In years gone by the Chinese consumer, and the services sector more broadly was a much smaller proportion of the Chinese economy that is now. Now it makes up more than 50% of economic activity and as such is an important bellwether of internal demand. Economic activity is still expected to improve with industrial production set to move back into positive territory, however rising unemployment is still expected to act as an additional brake on a sharp rebound.  

Vodafone FY20 – 12/05 – it’s not been a particularly good last two years for Vodafone shareholders, with the shares losing half their value since the beginning of 2018, on a combination of concerns over rising debt levels, and underperformance across all of its divisions. Last year the company cut its dividend due to concern over its rising debt levels. In November the company also took a £1.9bn loss due to problems in India, as a result of a court decision that ruled in favour of a government demand to pay $4bn, though management also raised guidance for the year after improvements in performance from South Africa, Italy and Spain. The acquisition of cable assets from Liberty Global in Germany was also expected to boost full year revenues up to £15bn. The completion of a deal to create Europe’s largest towers portfolio with Italy’s TIM, has also yielded £2.1bn as it looks to monetise its 61,700 Europe wide towers infrastructure, as management look to reduce debt levels and ramp up the roll out of 5G. The company will also face challenges as it strives to compete with BT and Telefonica in light of the latter’s deal to buy Liberty Global’s UK broadband and TV assets. In a time of big consolidations in the telecoms sector Vodafone runs the risk of becoming “billy no mates”, having tried and failed to secure similar deals in the past..

Aston Martin Q1 20 – 13/05 – it’s been a tale of woe for Aston Martin since its IPO in 2018. One profit warning after another has seen the iconic brand lurch from one disaster to the next culminating in Canadian billionaire Lawrence Stroll stepping in to save the company from the disaster of administration. The outbreak of the coronavirus outbreak hasn’t helped either, prompting the shutdown of its manufacturing operations at a time when its new DBX SUV is being touted as the solution to its cash flow problems. The reopening of its St Athan manufacturing plant earlier this month will be a welcome respite, however this week’s update isn’t likely to be too instructive when it comes to the sales outlook given the company already has a decent order book of 2,500 cars. Part of the new strategy appears to be geared towards Formula One as well as looking to take on Ferrari by building new supercars including the Valhalla, and a new Vanquish.

Balfour Beatty Q1 20 – 14/05 – the construction sector has been one of the weak links in the UK economy for some time now, however Balfour Beatty has for the most part managed to rise above the woes of its competition. This is largely down to having been able to avoid falling into the clutches of Carillion all the way back in 2014. Since then under the guidance of Leo Quinn it’s been a long road back, with the company only focussing on high margin work. This has helped hugely in maintaining a healthy cash flow and saw profits last year rise 8% to £221m, when the company reported full year numbers in March. A rise in the order book and focus on high margin work saw net cash rise 68% to £325m. Despite this success the shutdown of the UK economy at the end of March saw the company postpone the payment of the dividend which was expected to rise by 33%. There is a chance that the company may well defer this week’s update given the disruption to its business in Q1.   .

Ted Baker FY20 – 15/05 - as if Ted Bakers problems weren’t bad enough, given the problems in Hong Kong last year, the company has issued several profit warnings over the last 12 months. The company also had to write down the value of its stock by over £20m at the end of last year, and just when you thought things couldn’t get any worse the coronavirus has hit retail sales demand across the world. The share price is already down over 90% from its peaks as it is, and with little hope of a pickup in consumer demand in the near future its near term prospects could well be bleak. It has managed to raise £78.75m by selling Big Lobster, which owns the Groups registered head office in London, with the £72m cash proceeds being used to pay down debts, when the sale and leaseback is completed in June. The one upside is that its store footprint is narrower than some of its peers, and the business rates holiday will also help on the margins, however that won’t help much if consumers stop spending. Guidance for full year pre-tax profits is expected to come in between £5m and £10m.

Cisco Systems Q3 20 – 13/05 – over the last 12 months Cisco Systems has been a steady source of income for dividend investors, despite seeing some disruption to its business in China last year due to China, US trade tensions. For its most recent quarter the company reported profits of $0.77c a share, however revenues slipped back by 4% to $12bn, due to rising economic uncertainties. At the time management expected that revenues could be expected to decline further in the upcoming quarter by about 2.5%, with profits expected to come in at $0.80c a share. Since then we’ve seen significant global economic disruption as a result of the rolling Covid-19 lockdowns that has hit demand across the world, which means that consensus estimates have come down to $0.707c a share.     

Marriott International Q1 20 – 11/05 – the travel and leisure industry has been one of the hardest hit as a result of the spread of coronavirus across the world. In February, Marriott reported profits of $0.85c a share on revenues of $279m which was a significant decrease on its numbers the previous year. Since its $13bn acquisition of Starwood in 2016 the hotel chain had seen its share price soar, helped by $16bn of buybacks to shareholders which saw the shares hit new record highs at the end of 2019. Since then the sector has imploded with lots of speculation about whether the hotel chain or its brands can survive on debts of $10.8bn and very little income in the short term. With hotel occupancy rates expected to fall to as low as 20% in April and May, and most of its employees furloughed, senior management are scrambling around to get funding to roll over their debts. In April Marriott raised $1.6bn for 5 years at a rather hefty yield of 5.75%, as it looks to buy itself time to ride out the current turbulence.