Sharechat Logo

Devon Funds Morning Note - 30 May 2024

Thursday 30th May 2024

Text too small?

Deal or no deal 


The US indices were softer on Wednesday, with the Dow falling around 1.1%, the S&P500 dipping 0.7%, and the Nasdaq backing 0.6% away from record highs. Nvidia though hit a new all-time high during the session. The AI darling was however outshone by two more older-fashioned names, with retailers Abercrombie & Fitch and Dick’s Sporting Goods surging on their results. The US consumer retains a strong pulse it seems. M&A activity is also alive and well with ConocoPhillips agreeing to buy a smaller energy sector rival for US$22.5b, and the owner of the UK’s Royal Mail agreeing to a takeover. One mega deal is not going ahead – BHP has abandoned the pursuit of Anglo American after its rival refused to engage in merger talks.

Cost of living pressures, and elevated interest rates have placed pressure on consumers globally over the past year. However, a common theme has been that many retailers with strong brands, and good market positioning have done better than others. This was evident again in results from two big retailers overnight.


Shares in Abercrombie & Fitch soared over 25% as the apparel retailer posted 22% quarterly sales growth to US$1b, well ahead of expectations, and the strongest in its history. Earnings were up seven-fold to US$113.9 million. The company said growth was broad-based across regions and brands, with Abercrombie brands delivering 31% growth and Hollister brands (now half of sales) registering 12% growth. For the full year, the retailer now expects sales to grow about 10%, compared with a previous outlook of between 4% and 6%. 


Abercrombie & Fitch’s share price has doubled this year and is up 500% over the past 12 months (the top performer in the S&P500). It has been something of a turnaround story for the 130 year old retailer in recent years. In 2016 the company was voted the most hated retailer in America on allegations over discriminatory and inappropriate marketing. In recent years the company has undertaken work to reimagine everything from its target customer to it supply chain. The brand which once dressed the likes of Theodore Roosevelt and Ernest Hemingway is now a Gen-Z favourite. 


A&F has not had to discount heavily in the past quarter to attract consumers, nor has another retailer which reported overnight. Shares in Dick’s Sporting Goods surged 15% after the retailer reported quarterly sales of US$3b, and same-store growth of 5.3%, more than double expectations. The company said footwear and apparel markets have been sluggish over the last year but are beginning to show some signs of life. Customers are spending more on new sneakers and athletic gear, while “shrink” (lost or stolen merchandise) increased less than expected. The retailer raised its full-year earnings guidance with comparable sales growth of 2-3%.


After the post Covid splurge, Americans are though cutting back on travel with some airlines it seems. Shares in American Airlines fell 15% after the airline slashed its sales outlook for the second quarter. The company expects revenues to fall as much as 6%. The downgrade comes as US summer travel demand is set to hit record levels. The U.S. Transportation Security Administration screened 2.95 million passengers last Friday, the highest number on a single day. Earlier this week United Airlines reaffirmed guidance. American has been losing share to rivals it seems, particular in corporate travel. 


Health stocks were lower. United Health said that states appeared to be reducing enrolees in Medicaid health programs post Covid. On the earnings front HP, the manufacturer of PCs, beat on earnings. Salesforce was going the other way, falling over 15% after hours as the CRM software provider fell short of estimates on both top and bottom lines. 


The energy sector was abuzz with takeover activity. Marathon Oil jumped 8% after ConocoPhillips agreed to buy the smaller energy company in an all-stock deal worth YS$17 billion. The transaction will boost the oil major’s shale assets (adding 2 billion barrels of resources) as the broader oil and gas industry undergoes a major wave of consolidation (Exxon Mobil and Chevron have recently agreed deals). The merger is expected to generate US$500 million in savings allowing share buybacks of US$7b in the first year. The deal will see Conoco leapfrog BP in terms of market value. As an aside, Nvidia’s market cap is US$1 trillion more than that of the entire S&P 500 energy sector. 


Corporates generally remain flush with cash, which is less than can be said for the global economy. A report from the Institute of International Finance shows that global debt is at US$315 trillion. The increase in debt falling out of the pandemic has been the biggest, fastest and widest ranging since World War II. Emerging market debt has been a key driver, hitting US$105 trillion, US$55 trillion more than a decade ago. Overall, household balance sheets are healthy, but government budget deficits are “running higher than pre-pandemic levels,” the IIF added.

Across the Atlantic, there was also plenty of M&A buzz. Oil services company Wood Group said that it was evaluating a fourth and final "unsolicited, preliminary and conditional £1.5b takeover proposal” from Dubai-based engineering and consulting firm Sidara. Royal Mail owner International Distribution Services rallied after saying it had reached an agreement with Czech billionaire Daniel Kretinsky on a takeover of the 500 year old company, worth up to £5.2b. The billionaire has pledged to maintain Royal Mail’s guarantee of services six days a week for five years. The deal is politically sensitive and the UK government has the power under the National Security and investment act.

One deal that is not happening, at least not any time soon, is a merger between BHP and UK listed Anglo American. BHP is walking away from what would nave been the biggest mining deal in over a decade. Anglo bas been reluctant to engage on the terms offered. BHP will have to reevaluate where it sources copper growth.

The FTSE declined 0.9%, while the STOXX50 fell 1.3%. An ECB official has watered down the prospects for rapid rate cuts this year. European Central Bank Governing Council member, Klaas Knot, said rates will “slowly but gradually” move into less restrictive levels. Markets are pricing in two cuts this year, with the first anticipated next week. Inflation numbers are due this Friday. Germany’s consumer price index rose 2.8% on an annual basis in May, up from 2.4% in April. Consumer confidence in Germany and Italy ticked higher in May, while French sentiment was flat and Portugal’s declined, a range of surveys showed.

Asia markets were lower. The Nikkei dipped 0.8%, and the Hang Seng fell 1.8% on US rate concerns. Tech shares weighed with e-commerce giant Alibaba falling 3.5%. 

New Zealand

The Kiwi market was flat on Wednesday, with the NZX50 closing at 11679. Fisher & Paykel Healthcare surged in the wake of its full year result, before closing up 4%. Mainfreight added 2% following its numbers. Contact Energy was 0.6% higher. Spark NZ declined 1.7% while Mercury NZ dipped 0.9%. Meridian eased 0.2%. A2 Milk corrected from the recent run, falling 4%. It is a big day today with the budget. More colour on tax cuts will be one focus. 

The reaction to the numbers from Fisher & Paykel Healthcare was very positive. Underlying figures were in line with a fairly wide guidance range with 6% growth. Abnormal items included provisions for a voluntary product recall of Airvo 2 devices made before August 2017. Hospital product group revenues rose 5% to $1.1b, while homecare produce group revenue rose 8% to $652.3m. The company said one of the highlights of the financial year included opening a third manufacturing plant in Tijuana, Mexico. Margins increase 216 basis points on a year ago to 61.1%. FPH is targeting a long-term gross margin target of 65%. 

The company expects net profit after tax in FY25 to rise to $310 million to $360 million after it slowed to $132.6 million this year due to three “abnormal items”.
Revenues are expected to be in the range of $1.9b to $2.0b. The share price rose and is up 22% this year.

There was also a positive reaction to Mainfreight’s results. The transport and logistics company delivered a 17% decline in revenues to $4.72 billion, and a 33% decline in full year profit before tax to $395.4 million. Profit was in line with market expectations, Freight volumes and rates are normalising post the pandemic. Operating cash flows declined from $757m to $505m. The comparatives were set against a record year previously. 

Trading improved in the second half, especially across Australasia, and Mainfreight opened a branch in India in September. The company maintained its dividend, a testament to a strong balance sheet and the confidence of management to look through the current cycle. Management did have some comments around the loss of rail services between North and South Island – which would mean significantly more truck and trailer journeys – 5,700 to be precise. 
Fonterra was also out with a third quarter update. The Co-op reported a 2% increase in profit after tax from continuing operations to $1.013 billion, and lifted its earnings forecast. The dairy company said the results was driven by strong earnings momentum across all three of its product channels. Foodservice and Consumer volumes are up 4% and 7% respectively year on year.

Fonterra’s forecast FY24 earnings range has been lifted to 60-70 cents, up from 50-64 cents per share. The co-op announced an opening 2024/25 season forecast Farmgate Milk Price of $7.25-$8.75 per kgMS. Dairy prices have been on the up in recent months, and are back to levels seen at the start of 2024, which is great news for one of our biggest industries. China import volumes though have not yet recovered to historic levels, leaving some upside room. The co-op reports good interest in the consumer and associated businesses which is it looking to divest. 

Another deal not going ahead is a takeover of Comvita. The Manuka honey company this morning said that a highly conditional, unsolicited, indicative, non-binding proposal will not be proceeding. 


The ASX200 was 1.3% lower at 7687 as inflation surprisingly picked up in April, reducing the prospects of a rate cut by the RBA this year. The April CPI rose 3.6% year on year, up from 3.5% in March and above estimates for a 3.4% rise. Drivers were the biggest increase in health insurance premiums in several years, and bad weather which pushed up fruit and vegetable prices. Excluding holiday travel and volatile items such as fruit and fuel, inflation was 4.1%. 

This will not be lost on the RBA. Billions of dollars in upcoming state and federal government stimulus will be further factor while electricity rebates which come into effect from July may alleviate matters. Markets are now pricing in a 20% chance of a rate increase by September.

All 11 sectors fell, led by losses in consumer staples and industrials. Miners weakened as iron ore futures eased to US$118 a tonne. Ramelius Resources fell 5.3% as it filed an application with the Australian takeovers panel about a deal involving Westgold Resources and Canadian-based Karora Resources. The application may signal another wave of consolidation in the gold sector. Westwood rallied 4%.

Elsewhere Lendlease fell 1.5% on the news it had struck a deal to sell its US construction business. IAG also dipped in the wake of an action lawsuit over loyalty discounts on home insurance policies.

  General Finance Advertising    

Comments from our readers

No comments yet

Add your comment:
Your name:
Your email:
Not displayed to the public
Comments to Sharechat go through an approval process. Comments which are defamatory, abusive or in some way deemed inappropriate will not be approved. It is allowable to use some form of non-de-plume for your name, however we recommend real email addresses are used. Comments from free email addresses such as Gmail, Yahoo, Hotmail, etc may not be approved.

Related News:

Scott Technology appoints new CEO
Synlait FY24 guidance withdrawal
Meridian issues demand response exercise notice to NZAS
July 17th Morning Report
CRP - Korella North Environmental Approval Granted
SCL - Sale of Apple Orchards
Blackpearl Group Q1 FY25 Results Announcement
Devon Funds Morning Note - 16 July 2024
July 16th Morning Report
New privacy toolkit set to support business and organisations