Stock in Focus: Apple
Apple surprised us with iPhone sales rising to $51.3B vs. estimates of $48.9B. Some of this was likely due to the backlog of customers who were unable to purchase a new phone during the company’s supply crunch in China the previous quarter. We’re most impressed with services growth, which grew +5.5% to $20.1B. An astonishing figure: almost one billion people now use Apple’s services (iCloud, Apple music, Apple TV, Apple Pay, etc). We think as iPhone sales slow Services revenue will become more and more important – when you buy an Apple device you are effectively giving residual royalties to Apple for the rest of the device’s life. Hardware sales fell ~31%, in line with weakening consumer spending for “big ticket items” (aside from iPhones, which continues to surprise). Pleased to see continued buybacks: another $90B of stock repurchases are authorised for this year. Continue to be BUY rated – impeccable results once again. Note that Apple opened its first store in India this year – so far “switcher” numbers (Android users converted to iPhone) are looking good and we think this will be a continued growth area for the company.
New Zealand The New Zealand market fell (NZX 50, +0.5%) recovering from earlier losses on a quiet day of trade, as were in the middle of US earnings season and Australian earnings kick off. Slow news day
Australia
The Australian market (ASX 200, -0.06%) market was flat with moves mixed across sectors.Real estate and materials tried to offset some recent losses, while financials were the worst performing as sentiment towards Banks weaken from Wall street coupled by NAB’s half year result missing expectations.
NAB’s results missed market expectation causing the stock to slump -7.5% at one point and drag its banking peers lower, ending the day down 6.4%. The bank’s net interest margin improved but was lower than expected due to back book mortgage discounting. ANZ and Macquarie report today and Westpac next week which are our preferred banking exposures and are BUY rated.
US
US Banks still a worry
Despite the Federal Reserve’s assertion that the US banking system is strong and robust, more American banks appear to be facing difficulties. This was exemplified yesterday when PacWest Bancorp, a regional bank, experienced a significant drop in after-hours trading, falling by as much as 60%, following reports of potential plans for a breakup or a capital raise. The bank’s stock price has since fallen by over 40%. Similarly, Western Alliance saw a sharp decline of 60% after a report by the FT revealed that the bank was exploring strategic options, including the possibility of a sale. Although the bank denied the report, the share price still suffered losses, albeit to a lesser extent, with half of the losses recovered overnight. When there’s smoke there’s fire?
Johnson and Johnson spun-out Kenvue
Kenvue is the badly named spin-off of Johnson and Johnson, which now owns an enviable portfolio of consumer healthcare products – anything from Listerine to Tylenol. It exceeded its IPO price, coming in at +$25 per share (vs. $22) and is now worth ~$48B. If you owned JNJ stock you’ve already made money, as you received your stock at a valuation of $22. We still think there is room for the stock to move, but prefer to wait for the IPO pop before we rate it as a BUY. Look over to Pfizer’s consumer products spin-off, Haleon, for a clue where the stock could go – Haleon is currently trading at a pricey 30x earnings multiple. Wait on this one – we like buying it sub-$22.
Paramount
Paramount reported a $1.1B loss as streaming continues to be a loss-leader – the company’s streaming unit registered a $511M loss whilst subscribers grew to 60M (+4.1M from the end of last year). Notably advertising revenue fell 11% highlighting that “two tiered” advertising model that seems to be emerging – “first tier” advertising platforms like Alphabet and Amazon are increasingly taking more share of ad spend while “second tier” platforms like ooH!Media and Paramount are seeing a marked deceleration. Paramount’s stock fell ~28.25% as of writing on the news.
Overreaction? Perhaps – imagine you are a rival. Maybe you are Netflix or Disney. Right now you can buy Paramount and all its assets for a mere ~$10.78B. If you’re Disney, that’s about 1/18th of your current market cap and 1/7th of what you paid for 21st Century Fox. You buy CBS, MTV, Nickelodeon, Top Gun, Spongebob Squarepants, Top Gun – the list goes on. That seems like a good deal! If we were Disney we might do that! The kicker is, as always, the Redstone family which controls ~79% of the voting power. As Succession’s Roy siblings know, when it comes to a family company, it’s hard to say goodbye. We continue to be neutral on Paramount; preference is DIS and WBD. DIS offers high-quality assets, WBD materially undervalued.