Head of Equity Strategy
Summary: Operating margins continue to be under pressure as companies are facing high wage growth in both the US and Europe. In today's equity note we take a look at expected earnings this week from Airbnb, Disney, and Richemont.
The key conclusion in the ongoing Q1 earnings season is that companies are still facing margin compression as inflation in wages and raw materials continue to eat into revenue which has reached a limit as companies cannot continue to pass on all of inflation to customers. Many consumer goods companies have reported many quarters of small q/q declines in volume suggesting that we are reaching the point when further aggressive price hikes could seriously erode volume and production efficiencies. The 12-month trailing EBITDA margin in the S&P 500 has declined to 19.2% in Q1 2023 which is close to the long-term average of 18.9%.
Two other conclusions from this earnings season are that European companies are doing relatively better than US companies and especially on revenue growth, and then technology sector seems to have managed to stop the bleeding on operating profits due to aggressive cost cutting.
Airbnb will report Q1 earnings after the US market close on Tuesday with analysts expecting revenue of $1.79bn up 19% y/y and EBITDA of $259mn up from $37mn a year ago as the travel industry continues to rebound from the pandemic. Recent commentaries from Mastercard suggests strong cross-border volume and restaurant bookings in line with strong expectations for the coming quarters. Top line growth for marketplaces is ultimately depended on supply and Airbnb has seen a slowdown in available rooms recently which could be a key risk for the outlook. Airbnb’s average daily rate for a room has also slowed down and in recent quarters been below that of Marriott and Hilton which could to margin pressure for Airbnb. Despite these risks, Airbnb is expected to deliver FY23 revenue of $9.6bn and free cash flow of $3.5bn which relative to an enterprise value of $69bn is pretty high yield of around 5%.
Disney is expected to report FY23 Q2 (ending 31 March) earnings on Wednesday after the close with analysts expecting revenue of $21.8bn up 13% y/y and EBITDA of $3.7bn compared to $4.1bn a year ago. There will be a lot of focus on Disney given the intense fight between the CEO Bob Iger and activist investor Nelson Peltz that ended earlier this year with Bob Iger essentially delivering on all the requests from Peltz including drama cost reductions and promises of better profitability of its Disney+ streaming service. The Disney+ streaming service is not generating meaningful profits yet despite its many users and Warren Buffett said during his annual shareholder meeting over the weekend that the streaming industry is becoming extremely competitive which could dramatically worsen profitability going forward. Disney is up 16% this year.
Our luxury theme basket is the best performing basket this year as investors are betting heavily on luxury stocks to thrive as China’s economy rebounds from its strict lockdown during the pandemic and Chinese tourists are allowed travel visas again. The luxury basket is up 21% this year outpacing the global equity market and the Q1 earnings so far from among other LVMH have been strong and above consensus. Richemont, the Swiss-based luxury maker in jewellery and watches, is expected to report FY23 Q4 earnings (ending 31 March) on Friday before European equity markets start trading with analysts expecting full-year revenue of €19.6bn up just 2% compared to FY22 which saw strong growth of 46% and EBITDA of €6.16bn up from €5.03bn a year ago. With revenue growth estimates for FY24 at only 7% y/y Richemont could surprise to the upside given the underlying momentum in China.
Besides the three earnings releases mentioned above there are several other interesting earnings to watch this week. Nintendo is always interesting given the strong secular trend in gaming consoles and especially with its recent success with the Switch console. Rivian Automotive, that still owns the record as the most valued company relative to revenue in the history of equity markets, is reporting earnings tomorrow and given the adoption rates in electric vehicles this year this earnings release is a must. On Wednesday, green energy investors will focus on Vestas, one the world’s largest wind turbine makers, which has been dealing with manufacturing complexities and run-away costs negatively impacting profitability. In addition, slow permit permissions on wind turbines in the EU have slowed down revenue growth relative to solar modules. On Friday, banking earnings from Societe Generale will gather interest from investors still betting on stronger profitability ahead for European banks as the industry is pacing ahead of their US competitors; read our equity note from last week on the strong outperformance of European banks.
2024: The wasted year
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
