From skin in the game to ass on the phone. Here’s Nassim Nicholas Taleb flipping out about elementary critical reasoning at a Tesla customer service rep after somehow pocket-dialing a software upgrade.
"Make sure that you are in a situation where the constant mistakes are small and can be used for something" is one of several context-appropriate aphorisms from Mr Taleb, a man who seemingly doesn't use screenlock.
Since we’re on Tesla watch, the world’s most fascinating auto OEM has sold a few cars in California and might buy some cobalt from the world’s largest producer of cobalt. Also, Morgan Stanley’s Adam “Fanchart” Jonas has chucked in the towel.
We downgrade Tesla shares to Underweight from Equal-weight based on (1) valuation, (2) unfavorable risk-reward, and (3) risks to the long-term Chinese business that may not be fully appreciated by the market.
Where is Tesla now? In our opinion, four factors have driven TSLA's share price up ~105% over the last four months (vs. ~10% for S&P500): (1) stronger than expected global demand for Tesla vehicles, which has created more optimism around the long-term margin profile of the business; (2) China announcements that show Tesla's expansion into the world's largest electric vehicle (EV) market is progressing well from a demand and margin perspective; (3) supportive incentive developments (i.e. the potential, however small, for extended subsidies in the US); and (4) positive sentiment around product expansion. We believe these factors, combined with other market/technical forces have triggered a significant reduction in the market's implied risk premium for this asset. Near-term momentum and sentiment around the stock is admittedly very strong, but we ultimately question the sustainability of the momentum.
Mr Jonas downgrades while making big bumps to earnings. (“Our 2030 EPS increased 58% to $34.63 from $21.91 previously.”) It’s all based on 2m units by the start of next decade, 300k more than before, due solely to China. But robotaxis are finally recognised to be a fantasy so go down to $28 per share in the DCF, which put altogether moves to $360 from the previous, rather stale looking $250.
Elsewhere! Pearson continues to Pearson. Shares are down nearly 10 per cent at pixel to their lowest since 2008 after the educational materials publisher and/or textbook study in value traps guided expectations lower for 2020 in its full-year trading update. The 2019 figures (showing zero organic growth) are as expected, as you’d hope after multiple resets, but 2020 guidance is both weak and confusing. Here’s Morgan Stanley to talk us through it:
The Pearson guidance is for operating profit of between £500m and £580m, including the 25% stake in Penguin Random House. This guidance is at $1.27 and includes the PRH contribution of c£65m. If we adjust to $1.30, that takes £15m off the number. In total, therefore, the guidance equates to £420-500m of EBITA on an ‘as now’ basis. Our equivalent expected EBITA range was £467-527m, so Pearson is c5-10% below expectations on this basis.
Pearson expects a net interest charge of £50m (MSe £52m) and a tax rate of 19% (MSe 21.4% – but our figure is higher as we exclude PRH that came in tax free – underlying the number is similar).Pearson expects net EPS of 46.5-55p (includes a full year of PRH, excludes the buyback). On the basis that the combination of these two is about 7% dilutive, the equivalent ‘as now’ range is c43.2-51.2p (MSe 47.6p). On that basis the EPS guidance is in line with recently lowered expectations.
Perhaps understandably, Pearson CFO Coram Williams has resigned to take “a comparable role” at a continental European company. Deputy CFO Sally Johnson takes over.
Here’s Shore Cap.
We believe that sustained investment and restructuring has improved PSON’s ability to accommodate changing consumption patterns, launch innovative digital products and capitalise on a favourable long-term outlook for global education spend. That said, we remain of the view that there is little potential for sustained share price upside until it can demonstrate that problems in N. America are transitory rather than of a long-term structural nature. In addition, the forthcoming departure of both its CEO and CFO suggests to us a period of uncertainty and possibly a loss of momentum.
Viewed from another respective this could be a very good time for a corporate / private equity buyer to run the rule over the business.
As things stand, we consider the group’s current stock valuation (FY20F P/E and DY ratios of 11.7x and 3.5%, respectively) as fair and therefore maintain our HOLD recommendation.
And here’s Numis Securities:
We remain very comfortable with our SELL on Pearson. End markets remain tough, and with the transition to a new CEO likely to take at least 12 months, we see scope for further disappointment looking forward. Our blended multiples based target reduces to 480p from 559p.
Hays’ year-end statement is a bit weak. Australian bushfires, French strikes and UK elections caused problems for permanent hires in December. Fiscal second quarter net fee growth falls 4 per cent rather than the 3 per cent expected, with a quite-scary-looking minus 6 exit rate likely due to clients putting off decisions until the new year. Here’s Jefferies:
Outlook comments highlight: 1) H1 EBITA is expected to be c£100m (JEFe £105m); 2) overhead costs will fall £5m sequentially in H2; 3) “Return to Work” data (how many temps returned to the labour market after Christmas/New Year and the first indication of how 2020 has started) will provide better insight at the February interims. Given the net fee exit rate and sequential FX headwind, EBITA could be flat/slightly lower in H2 and consequently FY20F cons EPS could decline by high-single digits.
Daily price action in NMC Health remains irrelevant. Wednesday’s development in the NMC vs Muddy Waters et al saga saw Krupa Global Investments, a Czech activist fund, say apropos of nothing that it holds positions equivalent to just over 0.4 per cent of the share capital and wants you to know the shares are “deeply undervalued” because they’re probably not zero-valued.
KGI suggests that ‘facts’ in MW report might be relevant but not significant enough that NMC should go bankrupt or go out of the business based on this information. KGI has analysed report from Muddy Waters and NMC valuation closely and we believe that shares of NMC are deeply undervalued at these levels even in situation that everything mentioned in MW report is true which is highly unlikely. In our opinion, shares would be fairly valued around 2000 GBP per share relative to peers.
It’s all a bit of a reverse ferret from Krupa, which wrote on December 27 that “if these allegations are correct, [the] growth story and excellent expansion of NMC business is gone and NMC share value should drop below £10.” Whether Krupa was holding its slightly more than 0.4 per cent of NMC’s share capital back then has not been disclosed.
The December housing survey from the RICS gives us our first opportunity of the new era to swerve the conversation into Dinner Party not Live.
The RICS survey, which was post election, “showed a marked and regionally broad-based improvement in its forward looking questions,” says JP Morgan Cazenove. “The expected prices balance leapt from 1 to 23, expected sales shot up from 13 to 31 and new buyer enquiries surged from -5 to 17. These are comfortably the highest levels reported since before the referendum and, in one reading, have swung from below to above their long-run averages.”
These survey responses are not simply general measures of confidence. They have the advantage in the current BoE debate of capturing sentiment which is based on informed knowledge about the latest housing trends from those working in the industry. The housing market is itself highly driven by broader changes in household confidence and, hence, this is an important indicator for the economy.
The marked improvement in the December RICS survey provides further evidence that should persuade the BoE that there has been an upswing in sentiment following the election. This is already evident in other general measures of confidence that have been released since the election. But it is starting to become clear in other, more tangible, reports such as the RICS and the REC report on jobs (released last week). The latter, for example, points to an upturn in the labour market.
All this positive sentiment stuff takes the edge off Wednesday’s weak inflation print and makes BoE’s January meeting “look like a close call,” Caz says. “We maintain the call for the BoE to stay on hold in January for the time being but next week’s data will be important.”
To sellside, and Goldman Sachs likes Vodafone, to which it’s joint house broker. GS also downgrades Telefonica Deutschland to “sell” and Orange to “neutral” as part of the same PDF bundle, which is mostly about cashflow.
We argue Vodafone has a strong opportunity to grow returns, with self-help efficiencies compounding a return to structural revenue growth. It is coming out of a period of declining growth, returns and share price in which investor focus has centred on the short term. Growth is now inflecting and management commentary on near-term trends is reassuring. Our report focuses on the longer-term outlook. We show that VOD offers superior returns improvement and FCF/sales vs the sector average and particularly the large caps. Our sector report highlights these have been the two key drivers of share price outperformance in EU Telecoms in recent years. We expect this to continue and reinstate VOD at Buy.
Barclays goes to “underweight” from “equal weight” on GlaxoSmithKline. It’s partly on a cautious view of DREAMM-2, GSK’s pivotal trial of a myeloma cancer treatment and partly on little evidence of growth returning at its HIV franchise. Unchanged £16.50 target.
DREAMM “looks challenged in the context of recent competitor datasets at ASH [The American Society of Hematology annual meeting], which looks likely to render GSK's timing advantage irrelevant. We cut peak sales to £0.3bn and are now 57% below consensus 2023E sales for the asset,” says Barclays.
2020 looks set to be a much tougher 'investment year' of little growth for GSK: we now model zero like-for-like sales and a slight EPS decline. Whilst the mid-term investment case retains merit, the breakup story has become less compelling given 2019's c.2-point P/E re-rating and confirmation the Consumer spin will have to wait until H2'22, leaving the pipeline rebuild as the key potential short-term delta for the multiple, in our view. First pivotal BCMA asset data thus assumed disproportionate importance, but recently underwhelmed and our analysis here does little to reassure on potential. Beyond 2020, we see top-line growth confined to LSD with limited scope for margin improvement ahead of Shingrix capacity uplift post 2023. Whilst dividend/FCF yields look attractive, the former is likely to remain a source of uncertainty and the latter elevated in the absence of a pipeline/growth story. Absolute valuation is not expensive, but it is relatively full and, with 2020E a flattish year, recent news disappointing (TANGO, DREAMM2, cabo CLR) and few pending notable catalysts, we cut mid-term EPS by MSD (mostly HIV) and reduce to UW.
(GSK’s LSD, by the way, refers to the lysine specific demethylase enzyme not the other one.)
Barclays is no fan of IQE. The Welsh silicon wafer maker goes down to “equal weight” due to “weak near-term visibility and related fears that its trade war-related share loss may be more than transitory.” That’s part of Barclays’ 2020 technology sweep, which looks like this.
[W]e think there are some attractive opportunities in both semis and even in telecom equipment. For semis we expect the cycle to benefit all names, but we retain a preference for ASML, STMicro and Dialog (all OW); we upgrade Aixtron to Overweight and Infineon to Equal Weight, but maintain ams at Underweight given concerns over the OSRAM acquisition. .... In telecom equipment, shares generally struggled last year, but we think Ericsson is well positioned for 2020 and unloved, leading us to upgrade to Overweight. We downgrade Spirent to Underweight,as despite very strong operations its 2019 performance and therefore valuation is among the highest in our coverage.
What else is happening? There are numbers from Whitbread, Halfords and AB Foods. ... The guy who didn’t cause the flash crash probably isn’t going to jail. ... LVMH bought a big rock from Botswana, which doesn’t on the face of it help the world’s 116th richest country’s attempts to develop a downstream diamond industry. ... The most powerful person in Europe met Angela Merkel. ... And Dick X Bove says 2020 “could be biggest year for bank mergers since the late 1990s” (reports CNN), which suggests the veteran pundit has successfully repressed memories of 2008-09.
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