Australia
Invocare: TPG revealed they will be pulling their $1.8b ($12.65 per share) takeover offer for Invocare, a month after revealing as the board rejected the first offer stating it was too low and have not been vocal on an open discussion – its stock has fallen +15% intraday so far. Our take profit call mid-March appears to have held up well, and we remain neutral rated on Invocare.
The Australian market (ASX200, -0.4%) was down on Friday on a mixed day of trade with losses from the ASX’s two largest sectors Materials and Financials dragged the market lower, while most other sectors traded in the green.
Lynas shares were up +4.8% after its March quarter update came in better than expected, and that ‘feed-on’ during the June 2023 quarter and gave investors more confidence for the transition from their Malaysian plant. Remain BUY rated.
BHP shares on the other hand were weaker after its quarterly production update missed across copper, iron ore and nickel. We remain HOLD rated, highlighting the recessionary events that will create a better buying opportunity for the major commodity stocks.
US Earnings
Another heavy slate of earnings this week — Alphabet, Amazon, Microsoft and Meta all report — alongside PepsiCo, Intel and Mastercard and Visa. Expecting weaker ad sales from Alphabet and Meta, slowing cloud sales from Alphabet, Microsoft and Amazon, and thinner margins over at Pepsico. In the last few quarters we’ve seen sales hold up pretty well at big tech — at some point though, ad spend’s gotta give and investors should be prepared for a disappointing slate of results. We expect AI to be the wildcard here: it’s probably driven cloud growth higher but also a significant source of cost – Microsoft’s investment in OpenAI didn’t come for free.
Over at Mastercard and Visa we expect consumer spending to continue apace. The big change we see is that shift from debit to credit — the balance sheet of the consumer has been spent down given the growing pace of inflation — we find it hard to say anything bad about Visa and Mastercard; no matter where we are at in the inflation cycle, people have to use their Visa and Mastercards.
Expecting another disappointing quarter from Intel. It relinquished its crown as the king of chipmakers some years ago and has never quite been able to catch up: this speaks volumes to how hard the chip business is — once you’re not on top of Mount Olympus it’s mighty hard to get back up. Pepsi surprised us last quarter (it’s not a stock we cover, but it’s a proxy for the wider US economy – esp. the consumer discretionary space). We’re interested to see if consumer spend is keeping up — and how much margin sacrifice the company needs to keep up sales. Expecting $1.35 of EPS — it’s the margin that gets you in the end.
Let us leave you with a quote from a Peter Lynch speech given in the 90s about McDonalds — which sums up how we feel about big tech and Visa/Mastercard:
“McDonald’s was up 10-fold after IPO but it was only in 18% of countries. Then it gets to 30% and the stock is up 30-fold. You have to know what innings you’re in. There were more post offices in California than there were McDonald’s restaurants. People missed the overseas potential too…Are you in the 3rd innings of a ball game that might last 20 years?”
The question you have to ask is – what innings are we in? We suspect were in the early 3rd innings of the ‘tech’ ball game — plenty of runway to go.
Week Ahead
Monday
US Earnings:
Tuesday
US Earnings: Microsoft, Alphabet (Google), Visa, Coca-Cola
Wednesday
US Earnings: Meta (Facebook)
Australian CPI Inflation
Thursday
US Earnings: Amazon, Mastercard
Pushpay holds its vote on new Takeover price.
Friday
US and Eurozone GDP Data
US Earnings: Exon Mobil