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Episode 12: Apple sales and the Coronavirus

Episode 12 - Part 1

Apple’s anticipated sales numbers for iPhone 11

Published on: January 28th, 2020 • Duration: 6 minutes

In this episode, we share what could potentially be in store for Apple’s stock once they announce their earnings report this week. We then turns our attention to Facebook. Despite the intense criticism they’ve received, they’ve experienced sizable growth—will their stock continue going up as a result, or will there be a large sell-off after their earnings report is released as historical patterns show? In the After section, we review the US Manufacturing PMI data and the results of Honeywell’s stock performance.

Woman stands in empty studio. On the back wall is a fluctuating bar chart
06:04
  • This is before and after from Refinitiv. I'm your host. Johanna Botta. 

    In today's Before section, we are looking at global tech heavyweights Apple and Facebook, which are reporting last quarter earnings this week. In the After section we will be examining manufacturing PMI. 

    In this episode we will once again be turning our eyes to the stock of the largest company in the world, Apple. The investment trade that defies gravity. They have been critiqued for not innovating since Steve Jobs passed away. And yet, what other brand can rival the fierce devotion that surrounds this global tech icon? Apple is expected to report iPhone 11 sales of 66.7 million units, at an average price of $781. Combine that with very strong sales of the Air Pod and Apple Watch, and you get revenue expectations of $88 billion, as well as an earnings per share of 4.54. 

    Bottom line, it's hard to believe a stock as important and as big as Apple, which had previously thought to have been fully valued, could climb 80 percent since June. But that's exactly what happened. And now we're looking at a tech giant worth over one point three trillion dollars, which makes it the largest U.S. company by market cap. So, with the stock already up 8% this year after last year's 86% return, a slip up in growth would not be taken fondly. And though tech, broadly speaking, is rich at a 22 multiple, Apple is now trading at the highest end of its multiple range. Although this year's 5 G iPhone is expected to be a game changing product ,we'll need to see guidance remain intact. After Apple's recent climb from its early June lows. We could potentially see a retracement. The first level of interest would be the 23.6% Fibonacci Retracement level, which would put the stock at $283.07. 

    Facebook has received a lot of criticism recently, and the New Year seems to show continuation for this trend. Customer information privacy is the issue currently on the agenda, and what comes down the pipe can seriously affect how Facebook makes money. So will that be the end of their reign? Probably not, as commanding eyeballs still matter, and in that regard, Facebook is still near the top of the food chain. Nevertheless, they did spend last year dealing with mounting headline risks on regulations and external pressures. So the table was set for them to fail. Most recently, the social media giant also resisted peer pressure to restrict politically targeted advertising. Others like Alphabet and Twitter barred political ads outright. But for Facebook, who depend on ads for 98.5% of their revenue, and 2020 being a Presidential election year, the opportunity seems to be too enticing to resist. Investors should expect more scrutiny in the aftermath of the election. No doubt the divided electorate will be looking for scapegoats. And Facebook is an easy target. And yet the networking site continues to see 22% revenue growth. And should continue to increase market share, which is remarkable given they have 2.8 billion users worldwide. Often companies use a negative backdrop to temper expectations, leaving room for over delivery. 

    Bottom line, the fourth quarter of 2018 saw Facebook earnings report come in as a big beat on the revenue of $16.9 billion, versus the expected $16.39 billion. The next trading day, the stock jumped 10%. But if we look back at the chart, a small beat of 1% on EPS on July 18th led to an 18% sell off the next day. We know there's no real wisdom in saying a good earnings beat will lead to more buying, and a slight beat will lead to a big sell off. But one thing together is where the stock was at the time of both double digit reactions. The July 18th sell off came after Facebook was trading at all time highs, and the large gains we saw in Q1 of last year, came after Facebook has sold off hard with the rest of the market at the end of 2018. A 6% post day move is priced in implied volatility, but perhaps based on the stretch situation of the chart, that's not enough. Facebook is expected to bring in $20.9 billion of revenue for the quarter, compared to $16.9 billion for the same quarter last year. That's a 23% revenue growth, very impressive for a $600 billion market cap company. Keep in mind, though, that the stock since then has rallied over 50%. 

    We saw manufacturing PMI come in weaker than expected at 51.7 versus expectations for 52.5. It seems that even optimism over a trade truce, and bid up stocks hasn't translated to an uptick in manufacturing expectations. In this bullish tape, though, good numbers get celebrated and bad numbers are shrugged off. The equities markets hardly reacted on the number and Honeywell traded up 0.25 basis points. We will just have to keep watching manufacturing figures as a broader recovery will not happen without it. 

    There it is. Apple and Facebook in the Before. Market manufacturing PMI in the After. 

    Refinitiv data throughout. 

    This has been the Tuesday episode of Before and After. 

    Please subscribe and hit the notification bell to ensure that you're alerted to all of Refinitiv’s future market updates. We'll see you on Friday. 

Episode 12 - Part 2

Coronavirus and the global market shakeup

Published on: January 31st, 2020 • Duration: 7 minutes

In this episode, we discuss how the Wuhan coronavirus has caused a global market shakeup. We then turn our attention to the Caixin Manufacturing PMI to get a pulse on China’s small and medium-sized businesses and its slowdown as a whole. As China’s economic activity has an impact on U.S. businesses, we look to Caterpillar, which may experience a short term squeeze. In the After section, we review the numbers from the December U.S. home sales and Lennar’s performance compared to the S&P 500.

Woman stands in empty studio. On the back wall is a fluctuating bar chart
07:09
  • This is before and after from Refinitiv. I'm your host Johanna Botta. 

    World markets are trying to figure out how to react to the Coronavirus, and this week we saw risk return to the markets with a pop in volatility. Of course, events in China have moved the markets for quite a while now. Whether it's trade wars or the new possibility of a pandemic, investors have been concerned about China for some time. That's because China has driven the global slowdown in manufacturing, and the case for the global recession starts there. 

    So this week, we'll focus our attention on China's Caixin Manufacturing PMI numbers, which come out on Monday. These figures provide a snapshot of China's small and medium sized companies, and many investors believe that this data can end up being more reliable than the country's official manufacturing PMI. Investors may be concerned if the Caixin numbers already indicate that activity is slowing down because of the Coronavirus. But a clear look at the current condition of the Chinese economy, could offer some useful guidance about the country's ability to weather the storm. 

    Earlier this week, global indices had a serious wobble when Chinese officials announced that the number of patients infected with the Corona virus had hit 6,000, and that more than 130 people were confirmed dead. The New Year break also got extended from January 30th to February 2nd - another blow to productivity. 

    Keep in mind, though, that a PMI reading higher than 50 indicates growth. The last Caixin Manufacturing PMI was 51.5, a signal of Chinese expansion. Historically, the readings in January are a little softer because of the Lunar New Year. And there's no reason why this year's reading would buck that trend. Remember, that weakness below the expected amount is what we're looking for. 

    The expectation for January is half a point lower than December's reading at 51.0. So still in expansion territory, but only just. Meanwhile, the services PMI has been stronger during China's recent down cycle. Last month it came in at 52.5. but the services sector is also more likely to feel the impact of the Coronavirus quickly. So some negative effects should be expected. The forecast for January is 52. That's also a half point lower than in the previous month. 

    Bottom line - Chinese Manufacturing PMI numbers spent most of the early 2019 below 50, and at one point hit a low of 48.3. A shock reading would be anything below 50, especially if it fell below the 49.4 reading of June last year. The Shanghai market has been closed this past week because of the Lunar New Year, and although headlines out of Wuhan may have lowered most people's expectations, a PMI reading that's firmly in expansion territory could help set a more positive tone for when markets reopen. 

    So we've had a week of international markets trying to price Shanghai's expected drop, and a week's worth of trading could carve out a significant range on the re-open. So it will be really difficult for the short term traders. 

    ASHR the U.S. listed A shares ETF priced in a 5% decline in Chinese A-Shares after Shanghai's last trading day. A 5% drop would put the Shanghai Composite Index at the 2,820 level. A further drop of 13.7% would have to happen to reach the 2019 low point of 2,440. And if it hits that number, it would mean the Shanghai Comp would already be down 20% for this year. That's not a short-term expectation, but we do know risk can price quickly. The caveat would be an unexpectedly strong reading showing growth, which would mean that previous government initiatives have taken hold and have been helping the economy endure. 

    Of course, our world is so deeply intertwined, that what happens in China has an impact on major U.S. companies. This week we're looking at Caterpillar or CAT, as it's often known. The company is the world's largest construction equipment manufacturer, and designs and builds forest, mining and construction machinery. 

    55% of its revenues come from outside the United States, so they're more exposed to international conditions than almost any other American corporation. Caterpillar's earnings had been growing by double digits in 2017 and 2018. But then in 2019, global trade tensions restricted everything, and forced CAT to confront a major challenge. Construction equipment was the most directly impacted vertical by China's demand slowdown, and mining equipment was down some 30% in 2019 as well. 

    CAT's recent sell off in 2020 has been more pronounced than the broader market. And that's what the S&P still within striking distance of its all-time high. We can see CAT hit a five year high back in January 2018, but its share price is now 20% lower. Last quarter, CAT missed estimates for its earnings per share, and came in at two dollars and 70 cents, rather than the expected two dollars and 87 cents. The next day, the stock still rallied 1.3%. 

    CAT has lagged the market by a wide margin early on in 2020. And if the market stays firm, and that's a big if, given the current news cycle, then there are many scenarios that could lead to a short-term squeeze. And an earnings miss is one such scenario. On the other hand, one caveat for the upside trade would be a horrific guidance picture for the remainder of 2020. 

    The bottom line - a meaningful break under the 135 level could see CAT soon visiting the 2019 lows around 115. 

    New Home Sales in December came in lighter than expected at six hundred and ninety four thousand, versus the expected seven hundred and twenty eight thousand. And what did Lennar do? It rallied, of course! Finishing Monday up .98%, which was super impressive considering the S&P traded down 1.57% on the day. As of this recording, Lennar is the top performing stock in the S&P 500 for 2020. And as we pointed out in the last episode, it could remain a real market leader for the rest of Q1. 

    There it is, China Manufacturing PMI and Caterpillar in the Before section. And New Home Sales in the After. Refinitiv Data throughout. 

    This has been the Friday episode of Before and After. 

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