The coming week is jam-packed with company updates in what is the busiest part of results season in Europe and the US, while Rishi Sunak’s Budget, several central bank decisions and the Cop26
Among the near-50% of US companies and 35% of European companies scheduled to report next week are HSBC, Lloyds, Natwest, GSK and Shell, plus Nasdaq titans Apple, Amazon, Alphabet, Microsoft and Facebook.
The United Nations climate summit, better known as Cop26, takes place in Glasgow next week, following G20 talks in Rome over the weekend, and decisions made there could, or should, have massive implications for everyone and every company in the world.
The need for bold action was made clear in August’s warning from the UN’s climate change committee that global warming is happening much quicker than previously predicted.
Many companies will be attending Cop26 – so long as their commitments to reduce carbon emissions to zero are verified, but ahead of the conference, both Shell and BP were reported to have been excluded, with UK civil servants expressing doubts about whether their net-zero plans “stack up”.
Meanwhile, showing how difficult it will be to agree multilateral pledges such as the Paris Agreement of 2015, some of the largest producers of coal, oil, beef and animal feeds, including Saudi Arabia, Australia and Brazil, have been lobbying to water down a UN climate report on reducing use of fossil fuels, while the USA is reported to be holding up negotiations on a deal to provide poorer countries with a yearly total of US$100bn to combat climate change.
Economists at ING suggested four things for investors to watch at Cop26 were: whether governments align their emission reduction policies with carbon neutrality, whether governments make their Covid-19 recovery plans greener, whether China and India will present credible commitments to phase out coal, and whether governments implement carbon markets and increase climate finance.
“COP26 has been described as the ‘last best chance’ of saving the planet,” said ING economist Samuel Abettan. “Weary campaigners and world leaders are well aware that we’ve heard that many times before. Let’s hope we’ll be surprised.”
Sunak Budget bonus?
Financial markets have been very focused on a potential interest rate hike, but rather than monetary policy developments, many economists think fiscal changes are currently more important for the UK economy.
Indeed, with the government’s support has been the key tool to carry the economy through the pandemic, Deutsche Bank (NYSE:DB) said the likely steeper fiscal drag would results in a much more material impact.
As Chancellor of the Exchequer Rishi Sunak heads into the autumn Budget, he has a lot more fiscal wiggle room than previously expected, with fresh figures showing government borrowing is GBP44bn less than the GBP152bn predicted by the Office for Budget Responsibility in March.
However, Sunak’s agreed spending commitments on the NHS, schools and defence will absorb much of the wiggle room, meaning he may have to cut elsewhere in order to meet his objective of balancing the budget by the end of the parliament in three years.
Taxes are not something he is likely to cut, but Deutsche’s Sanjay Raja predicts the spending review and revised economic assumptions around pandemic scarring will result in a more rapid fall in borrowing, which “should also allow the Chancellor to meet his prospective fiscal rules by the end of parliament, opening the door to more spending ahead of the next general election”.
HSBC, Lloyds and NatWest in grip of rate hike fever
Alongside the Budget it is also a week full of UK bank updates.
Barclays set a high bar last week, but brokers seem confident its peers will at least maintain if not improve upon the bullish tone and bumper numbers from the blue-blood bank.
HSBC PLC (LSE:HSBA) kicks off proceedings on Monday and analysts at UBS expect the Asia-focused bank to announce a US$2.5bn share buy-back as part of a steady ramping up of shareholder distributions in coming years.
“We assume US$11bn in buybacks in 2021/2 and a 10% yield by 2025.”
Reassurance that it is insulated against any fall-out from the tottering Evergrande Asian property empire would also be welcome, the UBS analysts added.
Lloyds Banking Group PLC (LSE:LLOY) on Thursday seemingly has the most scope for disappointment, lacking the investment bank operation that powered Barclays and the US banks forward over the third quarter.
Worries over the impact of rising living costs and how that affects bad debts and the prospect of an interest rise have hurt the share price, but net income is tipped to be well up in these numbers helped by growth in mortgage and unsecured loans.
It is also new Lloyds chief executive Charlie Nunn’s first outing, so brokers expect a conservative view on dividends with the strategy going forward to be outlined with the full year results.
Key within results will be assessing how those benefits are reinforced by a potentially larger rate hedge and offset by the significant decline in flow mortgage spreads, said UBS.
US earnings season: Apple, Alphabet, Facebook and more
The busiest week in the US earnings season is upon us, and things have been going well so far.
As JPMorgan has noted, while only 17% of companies in the US and 16% in Europe have reported, initial results point to better than expected earnings growth in both the US and Europe, with 86% of S&P 500 companies beating EPS estimates and 68% in Europe.
Facebook and Kimberly-Clark get us off to a start on Monday; with Tuesday’s names including Alphabet, Visa (NYSE:V), Texas Instruments, UPS, General Electric (NYSE:GE), Twitter, Hasbro (NASDAQ:HAS), 3M and Lockheed Martin (NYSE:LMT); on Wednesday it’s Microsoft, Coca-Cola, McDonald’s, AMD, Boeing, Ford, KLA Corp, Spotify, Kraft-Heinz and Xilinx; then Thursday sees Apple joined by Amazon, Comcast (NASDAQ:CMCSA), Shopify (TSX:SH., NYSE:SHOP), Starbuck’s, Caterpillar, Newmont Corp, Hershey and Yum! Brands (NYSE:YUM); and the week finishes with Berkshire Hathaway (NYSE:BRK), ExxonMobil, Chevron and Colgate-Palmolive on Friday.
For the final quarter, analysts have forecast revenues of US$84.8bn and EPS of US$1.23.
“Despite the chip shortage noise, we believe Apple will deliver clear upside to Street numbers across the board as iPhone 13 demand was robust globally with China front and center,” said broker Wedbush.
“The elephant in the room for Apple (and every other tech and auto player) heading into the conference call remains the chip shortage crunch and what impact this global logistics Rubik’s Cube will have on iPhone builds and shipments for holiday season.”
Wedbush analysts reckon Apple will need to cut iPhone units by 5-10mln due to the chip shortage, meaning Wall Street is expecting December guidance to be “a bit mixed”.
Moving to the smaller (at just US$2.3trn) Microsoft Corporation (NASDAQ:MSFT), the software and hardware giant’s last financial update last month included an 11% hike for the September quarter’s dividend along with the launch of a US$60bn share buyback.
Wedbush is expecting “incremental strength again” as Microsoft’s Azure cloud hits its next gear of growth.
“We are seeing deal sizes continue to increase markedly as enterprise-wide digital transformation shifts are accelerating with CIOs all focused on readying their respective enterprises for a cloud driven architecture with MSFT poised to beat Azure whisper growth numbers of ~45% this quarter.”
Wall Street’s view that cloud growth will moderate as the home working cycle runs out, but Wedbush said Microsoft experiences in the field paint a different picture.
“We also believe the Office 365 price increase for 2022 was a smart strategic poker move that could be another $5bn+ incremental tailwind for Redmond in 2022, giving more confidence that numbers could continue to move higher.”
Things are a little hotter under the collar over at Facebook Inc (NASDAQ:FB), which reports on Monday amid accusations that it covered up research suggesting its products are bad for users’ mental health, while its WhatsApp arm was fined for incorrect use of customer data.
“All in all, a pretty horrible set of headlines,” said analyst Nicholas Hyett at Hargreaves Lansdown.
“The question next week is whether the bad news has had much impact on users.
“The group’s no stranger to bad press, and that hasn’t stopped daily user’s rising 79% in just two years. Advertisers too seem to be willing to overlook bad press to access Facebook’s audience, with average revenue per user up 43.5% in just one year. Management will hope this latest round of negative headlines is no different.”
Read across to Reckitt
Unilever reported sales growth above analysts’ forecasts for the third quarter but it also reported unprecedented cost inflation.
Reckitt’s 23 September trading update revealed trading since 27 July had been in line with expectations.
Shingles rebound for GSK?
First-quarter sales of Shingrix were down 50% year-on-year and were flat in the second quarter.
Quarterly sales of GBP414mln are forecast for the drug, which represents a year-on-year recovery of 18%, UBS said.
Overall core earnings from GSK “will likely be muddied by contribution from ‘covid solutions’ (affecting both revenues and costs), which are excluded from FY21 guidance,” the Swiss bank added.
Analysts are expecting third-quarter revenue of GBP8,759bn, core earnings before interest and tax of GBP2,350bn and core earnings per share of 0.29p.
Shell is still an oil company – and profiting nicely
It’s third-quarter results, among the many on Thursday, will no doubt be full of commentary and quotes about the energy transition, not least with the COP26 summit only around the corner.
Cashflow, profits and dividends will be the what the investors will be looking at – though a lot of those details were given in an unscheduled update earlier this month.
Trading results are expected to be better than in the second quarter, particularly for the integrated gas business.
Shell said it expects cash flow from operations to be “significantly impacted by large variation margin inflows on the back of the prevailing gas and electricity price environment” – which is a convoluted way to say that Shell is making a lot of money by selling its product at a higher price.
The sentiments were echoed by UBS: “Integrated Gas should benefit from better trading and optimisation earnings than 2Q (we see this as the absence of a negative rather than obvious upside benefit from the current LNG market given various production shortfalls).”
The Swiss bank’s analysts added: “Upstream earnings are held back by the impact of Hurricane Ida, especially on GoM production with the Mars complex shut in through Sept (production impact 90,000 boed and adjusted earnings hit by US$200-$300mln).”
Significant announcement expected in the week ahead:
Monday 25 October:
Trading update: HSBC Holdings PLC
Economic data: Chicago Fed National Activity Index (US)
Tuesday 26 October:
Interims: e-Therapeutics PLC
Economic data: New home sales (US), Case-Shiller home prices (US), Consumer confidence (US)
Wednesday 27 October:
AGMs: Cap-xx, Frontier Developments PLC (AIM:FDEV), Hargreaves Services Plc (AIM:HSP, OTC:HGRVF), Ideagen PLC (AIM:IDEA), Invinity Energy PLC (AIM:IES), JPMorgan Global Growth & Income (LSE:JGGI), Mirada PLC (AIM:MIRA), Pantheon International PLC (LSE:PIN), Springfield Properties PLC (AIM:SPR)
Economic data: BRC shop price index (UK), Durable goods orders (US)
Thursday 28 October:
Trading updates: Lloyds Banking Group PLC (LSE:LLOY), Royal Dutch Shell PLC (LSE:RDSB), Helios Towers PLC (LSE:HTWS), Hunting PLC (LSE:HTG), Inchcape PLC (LSE:INCH), Indivior PLC (LSE:INDV), Mail.ru Group, PPHE Hotel Group Ltd, Totally PLC (AIM:TLY)
AGMs/GMs: Brooks Macdonald Group plc (LSE:BRK), Filtronic PLC (LSE:FTC), Highbridge Tactical Credit Fund PLC, Rosslyn Data Technologies PLC (AIM:RDT), South32 Ltd (LSE:S32, ASX:S32, OTC:SHTLF, JSE:S32), Tirupati Graphite PLC (LSE:TGR)
Economic data: Nationwide house prices (UK), ECB interest rate decision (EU), Initial jobless claims (US), GDP (US), PCE prices (US)
Friday 29 October:
AGMs: ADM Energy, ITM Power, Mattioli Woods, Maxcyte, OPG Power Systems, Sensyne Health
Economic data: Bank of England lending figures (UK)