Stocks

Johnson and Johnson (NYSE: JNJ) posted better than expected results this morning, beating analyst’s estimates slightly to report $23.4B in revs and EPS of $2.55 vs. analyst estimates of $2.49. We maintain our HOLD rating.

Netflix (NFLX) reversed their trend of decelerating subscriber growth, adding +2.4M subscribers in Q3. The stock rallied +14% in after-hours trading on the news. Revenue grew 5.9% to $7.93B, whilst net profit fell 3.5% to $1.4B. Notably Netflix’s operating margin fell to 19.3% from 23.5% YoY. Management attributed this largely to the strong US dollar relative to other currency. Management expects operating margin in Q4 to be ~4.2% vs. 8.2% a year earlier, as the strong US dollar continues to weigh. We think this is cautiously optimistic news for the embattled streamer, but we note that the valuation is still relatively high compared to peers such as WarnerBrothersDiscovery, Paramount and Disney. We remain NEUTRAL on the stock.

Costa Group shares plunged lower, after the fruit and vegetable grower released a disappointing update, saying 2022 full year earnings would come in only a touch higher than the previous year – a big downgrade from earlier which implied strong growth on top of a challenging year in 2021. This implies a weak second half, driven by adverse weather conditions, lowering citrus crop quality and pack out rates, given the recent acquisition and the citrus business making up a larger portion of Costa’s earnings.

We initiate coverage of Estée Lauder Companies (NYSE: EL) with a BUY (underweight) rating. The company is engaged in creating and selling high quality cosmetics, skincare, and perfumes. We think the company is best-in-class in its industry and acts as a compliment to a portfolio which is exposed to the rise of luxury and consumer disc. purchases.

We initiate coverage of Mastercard Inc (NYSE: MA) with a BUY rating. The company offers a payment network which is accepted globally by +40 million merchants. Together with Visa (NYSE: V) the two form a payment network duopoly. We see the primary drivers for Mastercard’s success as rising global incomes and a continued shift to a cashless society.

We initiate coverage of Domino’s with a HOLD rating. Domino’s Pizza is the world’s largest pizza chain. In the world of quick service restaurants, it is distinguished by i) it’s delivery/eat-out-first model and ii) the cheapness of its offering. For a long time, the leading pizza chain in the world was Pizza Hut. Pizza Hut was an eat-in concept. Delivery was secondary. Dominos made delivery primary and benefitted from cheaper store fit-outs (no dine-in floorspace, practically) and a pre-Uber Eats shift in consumer preferences to delivered food. Like its competitors Dominos largely franchises out, collecting a franchise fee and acting as the largest supplier to its stores (dough, cheese, toppings, etc). The delivery-forward model has faced some challenges as of late, as fuel prices and staff shortages eat into franchisee’s razor-thin margins.

We initiate coverage of McDonald’s with a NEUTRAL rating. As we wrote in our report on Starbucks, we like the quick service business because the set-up costs are relatively low, and the return is relatively high. Well-known brands are easier to sell; everyone knows what McDonald’s is. There’s a high degree of predictability baked into the model. We especially like McDonald’s because it is really a real estate company. The company owns roughly 70% of the buildings and 45% of the land of McDonald’s locations worldwide (excl. Russia). Franchisees pay a percentage of gross revenue (~10.7%) as rent and another percentage (~4%) as a franchise fee. The fact that McDonald’s sells burgers is incidental – it is a highly effective driver for franchisees to pay rent to the parent company.

We initiate coverage of Starbucks with a hold rating. The Seattle-born Starbucks is a globally known coffee chain with +33,000 stores worldwide. Starbucks has come under pressure from i) unionisation efforts ii) China’s extended COVID shut-down iii) shifting consumer tastes. Same-store sales in China declined ~43% in Q3 ‘22, whilst intl. same-store sales decreased 18%.