Market Overview

22 April 2020

Stay-At-Home Stocks Are Overbought on Expectations?

Oil could have earned our special attention, but the technical incident with negative prices for West Texas Intermediate (WTI) May futures has already been described in detail. The incessant downward pressure on energy markets, while storages are almost full and the demand is at bargain-basement levels, has become obvious for more than a month, and no one knows the exact lower limit for oil prices.

Leaving bloody oil traces off-screen for some time, it may be better to concentrate on more pragmatic movements on share markets. The decline in both European and American composite stock indexes yesterday has been limited, just as it was a week earlier. Today the indexes opened mixed, and later they rose slightly by European midday. But they are still between the hammer and the anvil when some hope is provided by the partial lifting of quarantine measures in certain US states and some European countries. The pessimistic thoughts may neutralise gains because of gloomy prospects of the global economic recession caused by the pandemic with indefinite deadlines.

Italy could start lifting strict stay-at-home orders from May 4, the country's Prime Minister Giuseppe Conte announced on Tuesday in social media posts. "In these hours the work of the government, assisted by the team of experts, continues without stopping in order to coordinate the management of the Phase 2, that of coexistence with the virus. Soon I will be able to communicate the details of this elaborate plan," he tweeted. In addition, Spain's Prime Minister Pedro Sanchez said on Wednesday that his government plans to begin winding down the coronavirus lockdown measures in the second half of May. This may be extremely important for turning the mood of market participants from Europe since Italy and Spain are the two most affected countries, but of course, the markets will wait for more details.

Reports from a number of companies, which will be released one after another this week, could support the glass half-full or half-empty view. Everyone is particularly interested in the reaction to the reporting season of the so-called stay-at-home stocks. Some of them can be attributed to this category very conditionally, such as, shares of Coca-Cola or Philip Morris.

Coca-Cola shares fell by more than five % for the last two trading sessions from $48.06 to $45.38 at the New York stock exchange (NYSE). It happened after the company announced it expects less soda drink consumption in Q2 2020 during the self-isolation regime and $8.6 billion revenue was even $0.23 billion higher than the Bloomberg expert poll consensus. The company presented the equity per share (EPS) near Q3 2019 level and better than Q4 2019 figures. In fact, Coca-Cola is not only producing soda drinks, but also cold tea, coconut water, ready-to-drink coffee and juices. Such reaction in price was, perhaps, also due to the company's stock prices, which was already well up from the March bottom of $36.27 per share.

Philip Morris, a Swiss-domiciled and New York headquartered multinational cigarette and tobacco manufacturing company with products sold in over 180 countries, suffered a decline in share prices. Its shares lost nearly six % if compared with the previous day's close, despite the fact that the company reported on Tuesday first quarter earnings that beat analysts' forecasts and revenue that topped expectations. Philip Morris announced EPS of $1.21 on revenue of $7.15 billion. Analysts polled by anticipated EPS of $1.13 on revenue of $6.79 billion. EPS of $1.09 on revenue of $6.75B was reported by the tobacco giant in the same period a year before.

On the other side, shares in Heineken fell by 1.2% after the Dutch brewer company reported a sharp drop in net profit for the first quarter as the virus hit sales volumes in March. Heineken shares are now more than 25% below their February peaks and it seems to have come as a surprise to many investors that residents drink much less beer in self-isolation, and also they do not smoke that much. Maybe the occasional dog walk doesn't "help". Do citizens just save their money for worst time, or they smoke or drink less to raise their immunity, or do they consume more stronger drinks? There are no reliable statistics on this issue yet, but the answer to it could probably be useful in the investment sense too.

One way or another, the telecommunications sector probably feels more confident in average than food or beverage manufacturers. Shares of Ericsson, which was once the number one communication giant, climbed 3.1% after the company backed its previous positive guidance feeling only "a limited impact" from the virus crisis. Ericsson share prices have fully recovered since the middle of March after 30% of virus-related decline and are returning to almost the highest levels of 2019. At the same time, it could also be within the concept that all the best and worst news for such companies are already priced in.

The very simple idea that the shares of many "stay-at-home" companies are maybe just overbought for the current moment as they have risen well over the past four or five weeks may be confirmed by the first reaction on Netflix Q1 2020 report. These shares did not adjusted downwards until the middle of March, although by that time share prices of almost all companies had already fallen. Netflix shares dropped in price by more than $100 from more than their $393 peak in February to $290 a share as the middle-March low. Since then Netflix's stocks have gained in value by more than 50% from the bottom to the new historical record of $449.5 on April 16. This is by $25 above the all-time record highs. The increased demand for streaming subscriptions in global self-isolation is probably the main reason for the movement as well as the natural expectations that this increased attention to the company's content will be reflected in the Q1 2020 report. However, too many positive expectations were already considered in the growth that took place before. Netflix shares rose to just $444.90 after the earnings report was published and continued to fluctuate in the range of $426 and $443 per share during Tuesday's trading session.

Netflix revenues rose nearly 28% to $5.77 billion, edging consensus for $5.75 billion. EPS grew to $1.57 from a year-ago $0.76, but fell short of expectations for $1.64 (estimates that were revised up heavily in recent weeks). Global streaming net added 15.77 million subscribers crushing consensus estimates for about 8.5 million. That compares to 8.76 million in net adds last quarter, and 9.6 million net adds in Q1 2019. That brings overall global paid memberships to almost 182.86 million, up 22.8% year-on-year.

Netflix management also said in its letter to investors that "for the most part" things have gone smoothly with product teams relatively unaffected and working on a scaled-back innovation timeline. But "we have seen significant disruption when it comes to customer support and content production." As for the next Q2 2020 forecasts they emphasised: "Despite paid net additions... revenue was in-line with our guidance due to the appreciation in the US Dollar vs. other currencies... as an example, the price for our standard plan in Brazil is R$33, which used to be $8.5 last year but now it is $6.5 based on April 2020 F/X rates, so we have a ~25% decline in US dollar average subscription price from Brazil, which offsets strong membership growth. Operating margin of 16.6% (vs. 10.2% in the prior year quarter) was lower than our 18.0% forecast as we incurred $218m in incremental content costs due to paused productions and hardship fund commitments (a 3.8 percentage point impact to operating margin)... due to the production shutdown, some cash spending on content will be delayed, improving our free cash flow, and some title releases will be delayed, typically by a quarter".

Looking at details of Netflix's statement it could be understood well that even for such companies that were seen to be least affected or were expected to benefit from the pandemic crisis, not everything is really that simple. In the coming days more interesting corporate reports are expected: starting from Snapchat mobile messenger who already published its report tonight but the reaction will come after the market opening today, and then Amazon and Intel on Thursday, which will certainly attract the maximum attention of the market community. Especially for Amazon, which has recently hired hundreds of thousands of new employees to deliver orders in the US and Europe, and its share price recently updated the historical record of $2,460 per share and closed $2,328 on Tuesday.


Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

Lysakov Sergey
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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