The Week Ahead – US Q4 GDP, PCE, ABF, easyJet, Tesla and Microsoft results
- US Q4 GDP – 26/01 – having started the first half of last year with two successive quarters of negative GDP growth, the US economy saw a return to positive GDP growth in Q3, of 3.2%, after a late upgrade from, 2.9% at the end of last year, with personal consumption coming in at 2.3%, a decent improvement on the 2% seen in Q2, and a significant improvement on the first iteration which only came in at 1.4%. The upward revision higher came about as a result of a rebound in consumer spending, as well as higher government spending. As we look towards this week’s first iteration of Q4 GDP is seems quite likely that we’ll see a slowdown from the strong performance in Q3. Expectations are for a modest slide to 2.5%, although with signs in recent months that consumer spending is slowing you might think that there could be considerable downside risks to that estimate.
- US Personal Spending/PCE (Dec) – 27/01 – the last 2 months have seen a sizeable slowdown in US personal spending. At the beginning of the quarter, in October, we saw a very solid rise of 0.9%, however November saw that fall sharply to 0.1%. That would suggest a rising caution amongst US consumers, which when combined with US banks setting aside hefty loan loss provisions as we head into 2023, that consumers are becoming more frugal with their spending. With the Federal Reserve due to meet next week the December Core PCE numbers could undermine the narrative for a step down to a 25bps rate hike at the next Fed meeting. With the core deflator now at 4.7% and its lowest level in 12 months, a further decline to 4.4% and the lowest level since October 2021, could rubber stamp what might come next week. What markets won’t want to see is a tick back towards 5%, and the peaks we saw 11 months ago.
- Bank of Canada decision – 25/01 – it was back in October that the Bank of Canada set the cat amongst the pigeons when it raised rates by a less than expected 50bps to 3.75%, in a move that suggests that central banks were starting to wake up to the possibility that too aggressive rate rises could do more harm than good. They then followed that with another 50bps rate rise in December, to 4.25%, as concern grew that raising rates too high could create problems in the housing market. With this week’s decision coming a week before a similar decision by the Federal Reserve a lot of people are looking at the Bank of Canada for a steer in terms of whether we could see a step down from the Fed. It is widely anticipated that the BoC will announce another step down to 25bps, after headline inflation fell back to 6.4% from 6.8% in December. Median core prices however have remained sticky, remaining at 5% in November and the highs of the year.
- Manufacturing and services flash PMIs (Jan) – 24/01 – in the past few months we’ve seen evidence that due to the sharp declines in energy prices that economic activity is starting to pick up. In Germany manufacturing PMI fell to 45.1 in October, but has recovered since then, albeit it is still very much in contraction territory. Services has seen a similar pattern, dropping to two-year lows of 45, before showing small signs of a recovery. In France, we’ve seen a similar pattern in manufacturing, although services have been more resilient due to the energy price subsides provided by the French government to cushion French households from the worst effects of higher prices. In the UK, manufacturing has struggled over the past 3 months and looks set to continue to do so, while services have been slightly more resilient. As we head into 2023 the challenges for business will be whether we see new investment, and a pick-up in economic activity, after the rising pessimism seen at the end of last year.
- Associated British Foods Q1 23 – 24/01 – for most of last year ABF shares couldn’t catch a break, falling to 10-year lows back in September last year. This weakness came despite a business that was performing well despite challenging economic conditions. Since those lows the shares have rebounded strongly. When the retailer reported its full year numbers back in November, annual revenues rose by 22%, to just shy of £17bn, while adjusted profit before tax rose 49% to £1.35bn. The Primark business, which accounts for just under half the sales, saw a 38% rise in revenues to £7.7bn, while also seeing an improvement in adjusted operating profits and margins, although rising energy prices and input costs are proving to be challenging. For the new fiscal year Primark’s adjusted operating margin is expected to fall to lower than 8%, on the back of higher costs and keeping prices unchanged for both the winter and summer ranges. For the rest of the businesses, Grocery saw a modest decline in operating profits and margins, due to rising wheat, energy and distribution costs. Sugar saw a decent increase in revenues and operating profits, however margins declined, and it was the same pattern in agriculture. As we look to this week’s Q1 numbers, shareholders will be hoping that ABF is able to match the decent performance seen by many of its peers over the pre-Christmas period which has seen the retail sector enjoy strong gains since the start of the year, and has seen it reverse its losses from last year.
- easyJet Q1 23 – 25/01 – it was only back in October that the easyJet share price hit a ten year low, with the airline posting a full year pre-tax loss of £178m, in November, its third annual loss in a row. Despite this unwelcome statistic the loss was much less than the £1.1bn we saw a year ago, and the outlook back in November was slightly more encouraging, although they said something very similar at the back end of 2021, and then the Russian invasion of Ukraine happened. The hope is that this year will be different and judging by the share price performance so far this year investors appear to think so too, with airline shares soaring since the end of last year, with easyJet shares up over 30% year to date. Last year also saw significant disruption due to capacity constraints at major airports as well as staff shortages, which resulted in huge delays and cancellations. During Q4 easyJet said it managed to achieve load capacity levels of 92%, however these were achieved by reducing capacity during the quarter, due to flight caps at Gatwick Airport and Amsterdam, in order to deal with the disruption which took place during Q3. For the whole of 2022 the airline saw the load factor return to 85.5%, up from 72.5% a year ago, but it is still below 2019 levels, when they were at 91.5%. It also has some way to go to match the levels being achieved by the likes of Ryanair, who returned a half year profit of €1.37bn at the end of their H1. Fuel costs for H1 are 74% hedged, up from 69% hedged a few weeks ago, and 51% hedged in H2, with the airline saying it expects to fly around 38m seats in H1 of 2023, a 25% increase year on year, and 56m seats in H2, a 9% increase year on year. easyJet holidays is also expected to add to the bottom line with a target of 30% growth for the coming year, after delivering revenue of £368m and a profit of £38m in 2022. In an attempt to get ahead of any logistical problems easyJet has said it is taking steps to build resilience in order that the problems encountered in the summer of 2022 aren’t repeated in the summer of 2023. This week’s Q1 numbers should act as a decent bellwether as to whether easyJet is on track to deliver on this.
- Diageo H1 23 – 26/01 – the challenge for Diageo will be in repeating its performance of 2022, when it saw double digit net sales growth, which was driven by its higher value super premium brands. Net sales rose by 21.4% to £15.5bn, with the sale of scotch whiskey, tequila, vodka and gin leading the charge. Sales of Johnnie Walker rose by 34%, while tequila sales rose by 55%. On a regional basis, Europe saw sales of spirits rise by 24%, however Latin America beat all comers with sales of 45%, which was largely driven by the acquisition of Casa UM. On guidance for 2023, management said they expected to see organic net sales growth of between 5% to 7%, and organic operating profit in the range of between 6% to 9%, a figure that was reiterated at their AGM in October. The shares have been trading in a reasonably tight band over the last six months are broadly unchanged from where they were when the company last reported in July.
- Tesla Q4 22 – 25/01 – with its share price having fallen over 60% in the last 12 months questions are being asked as to whether the bubble has burst for the electric car maker. Since November 2021 the shares have slumped from peaks above $400 to be within touching distance of $100, a huge decline for a business that is selling more cars than ever. In Q4 sales rose to a new record of 405,278, a 40% increase year on year, helped to some extent by Tesla having to cut prices in China during the quarter to help shift inventory. This pushed total deliveries for the year to 1.4m, a new record. Total revenues for the year are expected to rise by more than 50% a year ago, however margins are likely to be lower, and there’s the rub, despite annual revenues which have risen to over $80bn. Since those Q4 numbers were released, Tesla announced further price cuts in its markets in the US and Europe of as much as 20%. In Q3 the shares slipped after revenues and margins both fell short and the fear is that this is a trend that could well continue. On the plus side the recent weakness in the US dollar should help from a revenue and profits point of view. Gross margins in Q3 came in at 27.9%, however these could well see further pressure on the back of rising raw materials costs. The company also warned that battery supply chain constraints would be a limiting factor in the medium and long term. At the Q3 sales call CEO Musk said that Lithium prices were proving to be “crazy expensive”, although other costs pressures were easing. One other concern is that the economics of owning an electric car are becoming less compelling due to high electricity prices. Profits are expected to come in at $1.15c a share.
- Microsoft Q2 23 – 24/01 – after Microsoft reported its Q1 numbers back in October the shares slipped to their lowest levels since January 2021, despite beating on revenues and profits. We’ve seen a modest recovery since then but the shares have continued to struggle on concerns that the business will be able to sustain the type of growth that markets have become used to. There were some weak spots on the $50.12bn worth of revenues seen in Q1. The weakness came in the form of Windows OEM revenue, as well as Xbox content and services revenue which were the main drag. Windows OEM revenue fell 15% dragged down by lower PC sales, while Xbox revenue fell 3%. Consequently, personal computing revenue fell slightly from a year ago to $13.33bn. On the cloud side of the business, Microsoft s Intelligent Cloud business saw revenue rise to $20.3bn a rise of 20%, however it would appear that markets were expecting slightly better numbers here. On guidance Microsoft was more pessimistic predicting that weaker PC demand could see a high 30% decline in Windows revenue in Q2. Microsoft may have already given an indication of potential disappointment as it looks ahead to the rest of the year, after announcing the loss of 10k jobs over the next few months, in the last week. The company is also facing challenges to its acquisition of Activision over competition concerns, with regulators in the US, EU and UK all looking at the deal. Profits are expected to come in at $2.30c a share, but Q3 guidance is likely to be key.
- Boeing Q4 22 – 25/01 – despite posting a Q3 loss of $3.3bn a few months ago the Boeing share price has gone from strength to strength, and has come close to reversing all of its losses in 2022. Quarterly revenues came in at $16bn, with the company seeing a big fall in revenue in its defence and space division. This area saw a fall of $5.3bn, while operating margins fell to 52.7%, cause by technical challenges and various higher costs on its KC-46A tanker aircraft, VC-25B Presidential plane which resulted in $2.8bn in operational losses. With respect to the outlook for its defence division, the sector has an order backlog of $55bn, 31% of which comes from overseas customers. On the commercial aircraft front the company has resumed 787 Dreamliner deliveries, delivering 9 aircraft. In total 112 aircraft were delivered over the quarter, with a backlog of 4,300 planes at a value of $307bn. In December Boeing announced that delivered 480 plans and won 774 net new orders, for the whole of 2022, while in November the company secured orders from United Airlines for 100 787’s and 100 737 MAX’s. For Q4 Boeing is expected to return to a profit of $0.47c a share.
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