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Absent Guidance Takes Shine Off Europe’s Stellar Earnings Season

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PMN Business

Author of the article:

Bloomberg News
Joe Easton and Michael Msika

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(Bloomberg) — With Europe’s results season wrapping up, the main takeaway has been not the broadest earnings beat in about 14 years, but rather a dearth of guidance from many companies on a still uncertain future.
Only about 55% of firms reporting over the past six weeks have offered some form of guidance, according to Bloomberg Intelligence data, reflecting low visibility over when and how quickly economies will rebound after the roll-out of Covid-19 vaccines. Those giving no outlook saw an average share-price drop of 1.6% on the day of their results versus the Stoxx 600 Index, the data show.

Such uncertainty has dominated the narrative among investors, even as more than 60% of companies have topped estimates that were slashed in the wake of the pandemic, based on a Feb. 22 report from Morgan Stanley. A near yearlong rally in the Stoxx 600 index showed signs of faltering this week, with the lack of earnings visibility causing investors to focus more closely on the macroeconomic outlook, sector rotations, bond yields and inflation forecasts.
“I don’t think they are in a position to give clear guidance, as they don’t even know, frankly, how strong this recovery is going to be,” Karim Moussalem, head of cash equities at Cantor Fitzgerald Europe in London, said in a phone interview. He cited the example of EasyJet Plc, which reported a surge in bookings, but didn’t give a precise outlook.

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Despite this week’s volatility, the broader market is “buying into the idea that six to 12 months down the line the world will be in a very different place,” Moussalem said.
These are some of the key issues addressed this earnings season:
Upgrades
Upgrades to earnings estimates have been uneven across geographies and sectors. Year-to-date, Spain’s IBEX 35 index has seen the largest increase, with projections of 12-month forward earnings per share rising about 9%, while the OMX Stockholm 30 index has seen the smallest with predictions up 0.6%, UBS Group AG strategist Nick Nelson wrote in a Feb. 22 note.
At an industry level, mining, transport and energy companies have seen the largest upgrades to estimates, while health care, food products and pharma have had the biggest downgrades, according to Nelson.
With the macro-economic recovery taking shape as vaccines are rolled out and more countries create plans to come out of the pandemic, cyclical stocks have been particularly in focus. Since September, earnings expectations have been soaring for miners, autos, energy and banks, compared with the broader market. By contrast, estimates for defensive equities have lagged behind.
Cash Flow
“European companies have demonstrated the ability to adapt quickly and generate decent cash in a tough environment,” said Bloomberg Intelligence strategists Laurent Douillet and Tim Craighead. This is likely spurring further earnings upgrades given a brightening fourth-quarter picture, they said.

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According to the Bloomberg strategists, based on 159 companies that have reported 2020 results, free cash flow is up 4% year-over-year at 278 billion euros ($337 billion), despite a 29% decline in total net income.
Bailouts probably kept some “zombie” companies alive, the European Union said on Wednesday. Airlines could burn through as much as $95 billion this year, according to the International Air Transport Association.
Margin Expansion
Stronger margins have been a key feature of this earnings season, according to Morgan Stanley strategist Graham Secker.
“Companies have been able to manage their costs pretty aggressively,” he said. Much of that may have been on “complementary” expenses like travel and accommodation, as opposed to “hard and fast” cost cutting and job cuts.
“We’re at the sweet spot for corporate margin improvement,” Secker said, but while that can last another quarter or so, “things are going to get tougher.” Input price data and other gauges like purchasing managers indexes suggest cost inflation is building, he said.
Shareholder Returns
If there is another positive takeaway from this earnings season, it’s the return of payouts, whether in the form of dividends or buybacks. Bloomberg Intelligence estimates that the number of Stoxx 600 members omitting a dividend will fall to 54 in 2021, after rising to 171 in 2020 from 26 in 2019.
“Positive dividend newsflow is transpiring from fourth-quarter results, with a majority of companies talking about reinstatement or increases, and buybacks,” Barclays Plc strategist Matthew Joyce wrote in a Feb. 17 note. He sees further scope for dividend upgrades as the cycle matures, although Bloomberg Intelligence estimates they won’t exceed 2019 levels until 2024.

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Miners are leading the way amid soaring commodity prices, with both Rio Tinto Plc and BHP Group Plc having declared record dividends. Separately, historically high-dividend energy stocks are taking steps to restore payouts after drastic cuts last year. While banks are still limited by regulators in the amount they can return to shareholders, some are fully using their allowance or have started buybacks, and plan to continue increasing payouts.
ESG
Climate change risk has been a key topic in earnings calls this quarter. In the U.K., more companies will soon be required to publish climate-related information, in line with recommendations of the Task Force on Climate-Related Financial Disclosures, meaning many have been trying to get ahead in advance, according to Liberum’s Joachim Klement.
Alternative energy stocks have sold off this year, with the European Renewable Energy Index down more than 20% from its January peak, as lofty valuations began to act as a deterrent, while rising bond yields may threaten cheap financing for renewables-focused utilities, according to Barclays.
©2021 Bloomberg L.P.
Bloomberg.com

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Dangers of Big Oil Spending Cuts Are Visible in Angola’s Slump

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Author of the article:

Bloomberg News
Paul Burkhardt

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(Bloomberg) — The decline of Angola, from being Africa’s top crude producer five years ago to barely pumping more than war-torn Libya today, shows the heavy toll of a slump in oil-industry investment.
The nation’s production has fallen by more than a third since 2015, when international oil companies started slashing investment in response to a plunge in crude prices. Despite government efforts to stimulate activity, just a handful of drilling rigs now work in the deep Atlantic waters that hold the country’s greatest resources.

The situation could worsen as Big Oil makes another round of deep spending cuts, raising the possibility that Nigeria — another key OPEC member — could also suffer Angola’s fate. That would have consequences both for the oil market, which needs more supply from the cartel in the coming years, and the economic stability of a region that’s dependent on petroleum revenue.
“It’s a struggle for West Africa to compete” when investment is scarce, said Gail Anderson, principal analyst for West Africa upstream oil and gas at Wood Mackenzie Ltd. in Edinburgh. When returns are compared to other oil provinces, “Nigeria doesn’t stack up, nor does Angola.”
Angola’s oil production figures tell a bleak picture, especially for a economy that’s heavily dependent on petroleum exports. Crude output has held at a 15-year low of just below 1.2 million barrels a day since November, according to data compiled by Bloomberg.

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Even Libya, where the oil industry has been crippled by a decade-long civil war, pumped more crude than Angola in December.
The seeds of this decline were sown in 2014, when surging U.S. shale production caused a price slump. As Brent crude fell from above $100 a barrel to less than $30 within a couple of years, international oil companies slashed spending around the world.
Deep production cuts by the Organization of Petroleum Exporting Countries and its allies eventually spurred a rebound in prices, but offshore drilling in West Africa recovered far more slowly. Then the coronavirus pandemic triggered another deep plunge in oil prices, leaving just a single drillship operating in the waters off Nigeria and Angola by the middle of 2020, according to data from Baker Hughes Inc.
“Exploration investments in Angola had been on decline since the 2014 downfall,” said Siva Prasad, senior upstream analyst at Rystad Energy AS. Some subsequent offshore projects by Eni SpA and Total SE kept the stream from drying up completely, but the global pandemic and market downturn “forced almost every oil and gas corporation to return its operations and spending plans back to the drawing board.”
Our Fault
Angola has tried to slow the decline through a broad effort including auctions of new drilling areas and the restructuring of state-owned oil company Sonangol.
The government negotiated with companies to see if they could squeeze “a little bit more” from existing fields, according to Angolan Minister of Resources and Petroleum Diamantino Pedro Azevedo. Even with that effort, the country is targeting average production of 1.22 million barrels a day for 2021, which would mean it is unable to enjoy the benefits of a higher OPEC+ output quota as the cartel opens the taps later this year.

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“It’s our fault that we haven’t invested more in operations, haven’t invested more in Sonangol capabilities, haven’t invested more in refining,” Azevedo said at a press briefing in January.
Angola is largely dependent on deep-water fields, where the natural decline in output is typically faster than onshore. Without constant investment to improve oil-recovery rates or tap additional reservoirs, production can drop rapidly.
In Nigeria, about two-thirds of production comes from shallow-water and onshore fields, where output had recovered prior to the Covid-19 pandemic as unrest in oil-producing areas eased.
The country cut production sharply last year as part of the OPEC+ deal. Crude shipments last month fell to the lowest level in four years and output was below 1.5 million barrels a day. That’s less than half of the longstanding target it planned to reach in 2023, and deep-water drilling could potentially be “the engine of growth” for Nigeria in the years ahead, according to Wood Mackenzie’s Anderson.
Oil prices have mostly recovered from the historic slump caused by the coronavirus pandemic, with Brent crude rising above $65 a barrel in London. When major companies do start to spend again, fiscal terms will be crucial in determining whether Nigeria can boost investment, or share the fate of Angola.
But Nigeria increased the royalty for deep water in 2019. Companies including Total, Royal Dutch Shell Plc and Exxon Mobil Corp. have voiced concerns that the long-delayed Petroleum Industry Bill could deter investment.
“The problem for Angola is that there deep water production was already maturing and steeply declining and improved fiscal terms are not going to change the overall picture,” Anderson said. “Nigeria on the other hand has more choice and clearly could produce more if it got the fiscal and regulatory framework right.”
©2021 Bloomberg L.P.
Bloomberg.com

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Copper’s Yearlong Rally Feeds Through to Homes, Phones and Cars

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Author of the article:

Bloomberg News
Mark Burton and Michelle Jamrisko

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(Bloomberg) — In the face of surging copper prices, Carrier Global Corp. has a plan to contain costs: It’s hedging raw materials costs and then charging customers more for its heating, ventilation and air conditioning systems.
The Florida-based company’s strategy symbolizes the conundrum facing manufacturers as prices for commodities spike. With a path out of the pandemic in sight, corporate executives, economists and investors betting on a strong recovery face an acid test as producers try to shift the higher costs to consumers.

As copper prices reach a nine-year high above $9,000, moves like Carrier’s offer an early sign of success. Even after boosting prices earlier this year, the company still forecasts sales growth of between 6% and 8%. China’s Gree Electric Appliances Inc. — the world’s top residential air-conditioning manufacturer — also is boosting inventories in a roaring market for appliances and consumer electronics.
“They are stocking up, and they’re using it to make consumer products that the whole world has been demanding hand over fist on the back of the pandemic,” Michael Cuoco, head of hedge-fund sales for metals and bulk materials at StoneX Group, said by phone.

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But with money managers piling into commodities more broadly in the expectation that the rising costs of goods will eat into fixed-income returns, some observers see an inflationary feedback loop developing that could hit the real-world recovery much harder.
Brent crude started the year with its fastest rally on record, creating price pressures that could put a much more immediate strain on consumers. U.S. lumber futures also shot to a record, prompting fears of inflation in the housing market.
As investors react to fast-moving inflation dynamics across financial markets, copper is getting caught in the crosswinds. Prices reached a fresh nine-year high Thursday as Federal Reserve officials offered reassurance they don’t view the rising costs of goods as a threat to growth.
But on Friday, copper suffered the biggest one-day drop in more than four months, with a selloff in global equity and bond markets signaling that investors believe the effects may be less benign and a policy response may come sooner.
It’s all setting up a dangerous game of chicken between investors and central bankers led by the Fed. U.S. officials are adamant about pumping more stimulus to support a recovery, with a $1.9 trillion package up for congressional debate and a willingness even to run the economy a little hot to maximize employment.
“The rise in oil, agriculture commodity prices and others are all sending a signal that the market is getting more optimistic about the global recovery this year,” Khoon Goh, Singapore-based head of Asia research for Australia & New Zealand Banking Group, said in an email. “Given that inflation is starting from a very low point, there is space to absorb the commodity-related price increase.”

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Markets, meanwhile, are seeing a faster recovery and a greater risk of overheating, and they’re on guard for any sign that Fed chief Jerome Powell loses his patience with soaring inflation expectations and brings forward now-distant plans to make monetary policy less accommodative.
Manufacturers used to being caught between markets and policy makers, including with the U.S.-China tariff wars, already are making adjustments.
Carrier raised prices while also hedging more than 75% of its copper, aluminum and steel inputs after 2021, Senior Vice President Patrick Goris said during a Feb. 23 sustainability conference.
Home-improvement retailer Home Depot Inc. counts on being able to absorb the latest run-up in raw materials costs, President and Chief Operating Officer Ted Decker said on a Feb. 23 earnings call.
“We don’t have a lot of anxiety around managing the commodity flows,” Decker said. “We run this as a portfolio. We work closely with our supplier partners to be the advocate for value for the customer.”
Euro region manufacturers in February witnessed the sharpest monthly rise in input prices in nearly 10 years, according to IHS Markit. But after a yearslong spell of stagnant inflation and growth in the region, order books are filling fast and inventories of finished goods are tumbling.
The prospects for metals manufacturers look particularly bright as the European Union prepares to unleash a $1 trillion-plus stimulus program targeting copper-intensive renewable-energy systems and electric-vehicle infrastructure.

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Nexans SA, one of the world’s leading electric cable-makers, announced a restructuring that will involve divesting units servicing mainstay customers in the industrial sector to focus purely on growth in the global electrification drive.
Anticipating that surging demand will leave copper in tight supply, the French company also is bulking up its processing of recycled copper materials.
Even if copper prices run further during the demand boom, bullish investors say manufacturers will be well-positioned to pass on costs, given the metal’s array of uses in everything from cars, washing machines, wind turbines and grid infrastructure.
Additionally, it’s often used in small quantities in smartphones, fridges and TVs, making it a relatively minor component in the final cost paid by consumers.
“You probably don’t have a headwind to growth with this type of inflation — in the short term,” James Tatum, portfolio manager at New York-based Valent Asset Management, said by phone.
Rising prices for fuels and food could prove much more pernicious, given their significant weight in household spending. Energy and agricultural commodities are jumping, but central bankers aren’t worrying yet with nominal inflation rates still at low levels.
Still, with money managers pulling cash out of bond markets and parking it in commodities as a hedge, they may end up contributing to making more-aggressive inflation a reality.
“It becomes a problem when reflation turns into inflation, and people simply stop doing stuff because it costs too much,” Colin Hamilton, managing director for commodities research at BMO Capital Markets Ltd., said from London. “I would argue that we’re getting toward that point.”
©2021 Bloomberg L.P.
Bloomberg.com

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Earnings Results: Nvidia’s quarterly sales top $5 billion for first time amid holiday scramble for gaming gear

Nvidia Corp. reported Wednesday that quarterly sales topped $5 billion for the first time in the fourth quarter, as holiday gaming-chip demand and renewed interest in cryptocurrency mining vied with supply shortages.
Gaming sales surged 67% to a company record $2.5 billion, on gaming-card demand that Chief Executive Jensen Huang called “incredible.” Analysts surveyed by FactSet had expected Nvidia gaming sales of $2.36 billion.

Meanwhile, gaming-card supply shortages will likely remain going forward, said Colette Kress, Nvidia’s chief financial officer, on Wednesday’s conference call.
“The entire 30-series lineup has been hard to keep in stock and we exited Q4 with channel inventories even lower than when we started,” Kress said on the call. “Although we are increasing supply, channel inventories will likely remain low throughout Q1.
Nvidia announced last week that it hopes to ease shortages of gaming cards by launching a chip designed for cryptocurrency mining, called the CM. Cryptocurrencies like bitcoin BTCUSD, +1.26% and ethereum ETHUSD, +0.97% have soared to records over the past year, and a demand from miners to catch that rush has eaten into gaming supplies.
On the call, Kress said the company expects about $50 million from CMP sales in the first quarter, and the company plans to break out cryptocurrency-related sales in the future.
On the data-center side, sales nearly doubled to $1.9 billion from the year-ago period, while analysts expected sales of $1.85 billion.
“Our A100 universal AI data-center GPUs are ramping strongly across cloud-service providers and vertical industries” Huang said. “Thousands of companies across the world are applying Nvidia AI to create cloud-connected products with AI services that will transform the world’s largest industries. We are seeing the smartphone moment for every industry.”
Huang explained that more and more products are becoming like smartphones — in other words, products that require communicating with AI services that run in data centers in order to function optimally.
“You’re going to see smart lawnmowers, smart tractors, smart air conditioners, smart elevators, smart buildings, smart warehouses, robotic retail stores, entire store — the entire retail store is like a robot,” Huang said. “And they will all have autonomous capability, they’ll all be driven by AI.”

Read: Worldwide chip shortage expected to last into next year, and that’s good news for semiconductor stocks
For the first quarter, Nvidia forecast revenue of $5.19 billion to $5.41 billion, while analysts had forecast revenue of $4.49 billion on average.
Nvidia NVDA, +2.52% reported fourth-quarter net income of $1.46 billion, or $2.31 a share, compared with $950 million, or $1.53 a share, in the year-ago period. Adjusted earnings, which exclude stock-based compensation expenses and other items, were $3.10 a share, compared with $1.89 a share in the year-ago period.
Revenue surpassed $5 billion for the first time, by about $3 million, up 61% from $3.11 billion in the year-ago quarter, during a holiday season in which gamers found it difficult to find graphics cards, much less ones near the suggested retail price, as cryptocurrency prices skyrocketed. Just three months ago, Nvidia sales set a record by surpassing $4 billion in quarterly sales for the first time.
Analysts surveyed by FactSet had estimated $2.81 a share on revenue of $4.82 billion, based on Nvidia’s revenue forecast of $4.7 billion to $4.9 billion.
Shares, which had been up about 2% at the beginning of the call, were last down about 3% after hours. That followed a 2.5% rise in the regular session to close at $579.96.
Over the past 12 months, Nvidia shares have rallied 112%, while the PHLX Semiconductor Index SOX, +3.24% has gained 77%. Meanwhile, the S&P 500 index SPX, +1.14% rose 22%, and the Nasdaq Composite Index COMP, +0.99% gained 47%. Nvidia shares closed at a record high of $613.21 on Feb. 16.