Wealth Accumulated

By D J Thomas, a large-cap stock market value investor and financial writer

ExxonMobil

Why Adidas is a relatively unpopular large company

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An adidas trainer, black and white

Adidas reeling from Kanye colab

“The numbers speak for themselves. We are currently not performing the way we should,” CEO Bjørn Gulden said in a press release this week that also alluded to its inability to sell its Yeezy inventory with a potential impact of $1.3 billion. Last October the firm severed ties with Yeezy’s founder Kanye West after his well-publicised antisemitic tirades. In July 2021, shares traded at EUR319, today they’re at EUR139, with a dividend yield of 2.37%, and a PE ratio of 19. Adidas has all the hallmarks of a relatively unpopular large company.

Rinse and repeat

As if we didn’t get it first time around last week when the fed increased interest rates by 25 basis points, Fed chair Jerome Powell at the Economic Club of Washington said “the disinflationary process, the process of getting inflation down, has begun and it’s begun in the goods sector, which is about a quarter of our economy,”. Of the labor market, Powell ‘didn’t expect it to be this strong’ after a 517,000 print for jobs added in January. Those damned workers are just fouling the recovery. “My guess is it will take certainly into not just this year, but next year to get down close to 2%.” That’s a bet I’m willing to take.

Record profits at BP

Like ExxonMobil and Shell last week, the energy sector continues to reap the benefits of lockdowns and Putin’s invasion of Ukraine creating massive demand for oil with BP announcing record profits that more than doubled to $27.7bn (£23bn) in 2022. In the fourth quarter of 2021, Chief executive Bernard Looney said: ‘When the market is strong, when oil prices are strong and when gas prices are strong, this is literally a cash machine.’

A high dividend yield at Barrett Developments

With a dividend yield of nearly 8%, property developer Barratt Developments released its half-year results this week and decided to cut its dividend. David Thomas, Chief Executive said ‘Whilst we have seen some early signs of improvement in current trading during January, we will need to see continued momentum over the coming months before we can be confident that these challenging trading conditions are easing’. Pre-tax profits, earnings, and revenue all increased versus the same period last year. Forward sales were reported as 10,854 homes v 15,736 last year and the firm pointed to the pressure first-time buyers are under, roadblocking a clear pathway to recovery in 2023. Barratt has a PER of 5.78 and a price to tangible book of 1.03.

Disney cuts 7000 from workforce, proxy fight is over

Activist investor Nelson Pelz bought Disney stock at $92 a share in November 2022 for $865 million, launched a proxy fight and now the stock is worth $118 a share – a paper profit of $154 million after his stake increased in value to $1.1 billion. Peltz called off the fight this week after the announcement of a cost-cutting plan to the tune of $5.5 billion and a headcount cull of 7000 employees. Disney announced quarterly earnings per share of 99 cents, beating expectations, and revenue and subscriber numbers that came in as expected. Bob Iger said that “We believe the work we are doing to reshape our company around creativity, while reducing expenses, will lead to sustained growth and profitability for our streaming business, better position us to weather future disruption and global economic challenges, and deliver value for our shareholders”.

Bellway’s strengthening balance sheet

Like Barratt Developments, Bellway’s forward sales have declined and its customers are struggling with increased pressure from higher mortgage rates. Like all good housebuilders, it has large cash reserves and expects revenue to increase throughout 2023 despite the economic backdrop. ‘As the near-term economic outlook remains uncertain, we continue to take actions to maintain the Group’s balance sheet resilience. The measures include a freeze on new recruitment, limiting land approvals and a highly disciplined approach to production expenditure, as we align investment in work-in-progress to sales demand.’ When interest rates decline, you’ll find that demand for their homes will start to increase. In this climate, its easier for housebuilders to build their balance sheets rather than homes.

UK avoids recession

GDP fell 0.5% in December but that was not enough to impact growth for the final three months of 2022, coming in at 0% growth for the quarter. Last week The Bank of England said that it still expects a recession for the UK in 2023, but at a reduced severity than their previous forecast. The Office for National Statistics said that there were falls in services, education, and transport. Britain is scraping along the bottom quite nicely thank you.

How earnings from oil smash records whilst tech disappoints

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ExxonMobil gushes $56 billion in profits

It’s a record yearly profit for the company which previously stood at $45.2 billion in 2008. That was when oil hit $142 a barrel. The EU pre-empted Exxon’s swag with a $1.3 billion windfall tax in the fourth quarter. Shares finished the week at £112 also an all-time high for the firm. As noted two weeks ago, Putin’s invasion of Ukraine will prompt eye-watering earnings from the energy sector. Exxon’s Chief Financial Officer Kathryn Mikells said ‘strong markets, strong throughput, strong production, and really good cost control’ helped the firm to its record earnings.

Google earnings drop in Q4

Alphabet’s earnings came in at $1.05 per share, revenue came in at $76.05 billion continuing a downtrend trend in quarterly revenue growth since Q2 of 2021. In November 2021, shares reached an all-time high of $148 and have since fallen 29% to $105. The company also warned of a $2.3 billion charge it will sustain in Q1 of 2023 related to the 12,000 employees it fired in January. Further charges related to real estate – specifically its reduced office space, will start at $500 million in Q1 and further real-state charges are likely moving forward. Headcount growth cost it an extra 10% in operating expenses but CEO Sundar Pichai reiterated its focus on AI. With Google’s current legal proceedings in the US, there’s a lot for the executive team to be working on and shareholders to be mindful of.

Apple earnings growth slides

CEO Tim Cook blamed the macroeconomic environment and the lockdowns in China for not producing enough iPhones and iPads to sell for the latest quarterly earnings decline. Apple posted EPS of $1.88, down 10.9% YOY, revenue was down 5.49% YOY. Apple’s quarterly earnings have been declining in growth since the beginning of 2021, albeit from lofty heights (54.1% in Q1). The firm said that production levels of the iPad and iPhone are back to ‘acceptable levels’. The number of Apple active devices increased from 1.8 billion to 2 billion, including first-time buyers of the Apple Watch. Cook mentioned costs are being cut and hiring has slowed but did not see a need to slash headcount like others in the tech space. Despite the negative decline in earnings growth, Apple has faired much better than its tech peers due to prudent management of its hiring process, innovative product expansion (Apple Pay, Card, Music), and bringing new customers on board its product range despite the macro headwinds of the last few years: resilience.

Amazon issues guidance for Q1

Amazon expects YOY growth of revenue of between 4% – 8%, and online store sales declined 2% YOY. Consumers are slowly switching from e-commerce to high-street shopping since the end of the pandemic. CEO Andy Jassy, on top of announcing an 18,000 headcount cull last month, has frozen hiring, halted warehouse build, and is ‘… working really hard to streamline our costs and trying to do so at the same time that we don’t give up on the long-term strategic investments that we believe can meaningfully change broad customer experiences and change Amazon over the long term’. Amazon Web Services – its cloud business – declined in growth for the fourth quarter from 27.5% in the third, to 20%. Amazon earned 3 cents per share and operating income declined YOY due to $2.7 billion of charges, some of which related to severance payments. Shares are trading at $103, down from $183 in November 2021.

Meta shares explode 23% after results

Meta shares rocketed 23% in after-hours trading when the firm announced a $40 billion stock buyback, and beating revenue expectations for the fourth quarter. CEO Mark Zuckerberg said Meta’s “management theme for 2023 is the year of efficiency and we’re focused on becoming a stronger and more nimble organization.” Meta announced 11,000 layoffs last November. There’s also less expenditure expected in the future due to a switch to more cost-effective data centres. The Reality Labs unit responsible for the development of the Metaverse is expected to increase operating losses in 2023 ‘significantly’. Shares are currently trading at $186, down from $378 in September 2021. Without the share buyback, the value of Meta is in decline due to weak advertising demand and Tik Tok dominating ad revenue growth. Meta’s ad revenue declined 4% in the quarter and continues to be ‘impacted by the uncertain and volatile macroeconomic landscape’ according to Meta CFO Susan Li. Ad revenue represented 97% of Meta’s total revenue in the quarter.

Shell’s 115-year profit record

$39.9bn (£32.2bn) in 2022, the highest in its 115-year history. The price of Brent crude oil went to almost $128 a barrel after Putin’s invasion of Ukraine last year. It’s currently trading at $83. Shell said was due to pay $134m in a UK windfall tax for 2022 and more than $500m in 2023. Shell had paid $13bn in taxes globally in 2022 and only derives around 5% of its revenue from the UK.

US raises interest rates by 0.25%

The market expected it and The Fed delivered. A rise of 25 basis points from Jerome Powell and his team this week, the highest since October 2007. Inflation is still at its highest levels since the 1980s. Powell noted that inflation “has eased somewhat but remains elevated… inflation data received over the past three months show a welcome reduction in the monthly pace of increases… while recent developments are encouraging, we will need substantially more evidence to be confident that inflation is on a sustained downward path.”

UK interest rates highest for 14 years

The Bank of England raised interest rates by 0.5% to 4%. The market is expecting rates to peak at 4.5% in the summer before heading back down. The Bank has a 2% inflation target but prices are rising at 10.5%, a 40-year high. The market believes inflation reached its peak in the UK last October at 11.1%. Both the Bank of England and The Fed are in lockstep both with inflation and rate rises, but not on the upcoming recession – the IMF stated this week that the UK will be the only major economy to shrink in 2023, forecasted to be -0.6%.

Apple: the FAANG that hasn’t culled overhead. Yet.

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Macbook on a wooden table
Apple did not go on the same hiring spree as other FAANGS during the 2020 lockdowns

I remember laying down next to my allotment plot slash community garden during the summer of 2020. There was literally nothing else to do. I was happy with my employer, with my work. There was no reason for me to leave or seek alternative employment. That was not the case for millions of people who began applying for roles at big tech firms with the extra time they had on their hands to re-orientate their working lives.

Amazon ended up hiring 500,000 employees in 2020, and another 310,00 in 2021 to “meet the needs of our customers while ensuring the safety of our employees… [and] investing for customers and employees during these unprecedented times”. Microsoft hired to a less aggressive extent but the real ‘winner’ was Apple who kept the same hiring rates since 2016, notching the lowest percentage increase in headcount among the FAANGS.

This week, Microsoft CEO Satya Nadella said he will be “making changes that will result in the reduction of our overall workforce by 10,000 jobs through the end of FY23 Q3.” The company will sustain a $1.2 billion charge in its Q2 earnings next week “related to severance costs, changes to our hardware portfolio, and the cost of lease consolidation as we create higher density across our workspaces.” Gotta pay off all those employees somehow. Amazon’s Doug Herrington, the company’s worldwide stores chief, said in a memo Wednesday that they will cull 18,000 employees “so we can continue investing in the wide selection, low prices, and fast shipping that our customers love.

Finally, Google and Alphabet’s CEO Sundar Pichai said he took “full responsibility” for announcing 12,000 job cuts and that the company had rapidly expanded headcount in recent years “for a different economic reality than the one we face today.” The perverse nature of capitalism means that these layoffs will prove profitable for shareholders 1-3 years from now. Traders have already jumped into these stocks on the back of them being huge winners over recent years, but the fact is that as a collective and a large component of the S&P 500, they are still repairing the damage that bloat can do to a business. It’s worth keeping an eye on their earnings in 2023 for sure.

Inflation is falling in the UK. Except for food

“Baked beans are up over 50% in a year. Tinned tomatoes from Spain, also up 50%.” Philip de Ternant, a food wholesaler sounds exasperated on the news that inflation ‘fell’ from 10.7% in November to 10.5% for December. But it’s just not food that continues to see a tsunami of price rises whilst the rest of the inflation basket trickles downwards. Airfares, hotels, restaurants. Basically, if you want to sustain yourself whilst having any fun at all, your financial masters have made it impossible.

When’s a good time to FTSE?

Early in my dating life, I would take a girl to places that had tables. That was my sole choice for the date venue. Didn’t matter if it was a pub, cafe, or restaurant. Tables were where the action was in my mind. I could work my magic charming damsels and the table was like a wingman, allowing me to draw closer, squeeze a hand, and of course play footsie. I remember one particular barman of a local who was a family friend was so impressed with my dating skills that he gave me and my girl free drinks all night. That story is in no way connected to whether or not I think the FTSE 100 is trading at a discount to intrinsic value. Which it isn’t, especially as it’s trading near all-time highs. Now is not the time to FTSE.

The Christmas high street numbers ain’t pretty

US retail sales fell 1.1% in December according to fresh data from the Commerce Department. On top of that, wholesale prices measured by the producer prices index dropped 0.5% for December, more than expected 0.1% showing signs that the US economy is slowing down. The Dow ended the day down 600 points in response. The last time PPI dropped by this amount was in April 2020 raising fresh concerns about a recession.

In the UK, December sales fell by a record 5.8% compared with December 2021 as inflation, and in particular energy costs for households have soared over the past 12 months. It’s well known that where sales growth has been recorded, consumers spending more has been down to corporations raising prices due to inflation. This is the vicious cycle that the Fed and central banks around the world want to stop. Their only weapon in this fight is higher interest rates at the risk of destablising the economy.

Stock in focus: Ferrexpo Plc

As with any stock that’s main business is the production of a commodity, the share price can see swings wilder that an Andrew Tate house party. Chill out nothing’s been proven yet. This FTSE 250 producer and exporter of high-grade iron ore pellets to the global steel industry is based in central Ukraine, which explains some of the most recent price extremes. In the fourth quarter of 2022, Ferrexpo produced 0.4 million tonnes of iron ore pellets v 3.1 million tonnes in the same quarter of 2021.

This reduction is primarily due to the loss of electrical power for the majority of the quarter, which was partially restored in late December, in addition to existing constraints relating to Russia’s invasion. As of the date of this release, the Group continues to produce iron ore pellets using one pelletiser line (out of a total of four)… Full year pellet production of 6.1 million tonnes in 2022, down 46% year on year, reflecting operational and logistical constraints throughout 2022 due to the war in Ukraine (2021: 11.2 million tonnes produced).

Trading update, 11th January 2023

I’ve chosen Ferrexpo this week to highlight the effectiveness of the value investing approach I pursue and specifically the difference between a large-cap stock going through a temporary period of unpopularity such as ExxonMobil in 2020 when the price of oil went to -$37 a barrel and Ferrexpo. Both are commodity stocks. But both face or have faced, different problems. The prolonged nature of Russia’s invasion means that Ferrexpo’s problems are not temporary therefore Ferrexpo is not ‘investment grade’, even though it has a PE Ratio of less than 5, iron ore demand (prices) has been increasing, and its earnings have been growing steadily over the past few years. When the conflict in Ukraine looks likely to end is when to revisit Ferrexpo and its prospects for a brighter future.