FT : Cosmetics group Natura embarks on makeover

Cosmetics group Natura embarks on makeover
Body Shop and Avon owner is concentrating on revamping its brands during consumer spending squeeze

Only a few years ago, Natura &Co was a rare case of a Latin American business pursuing truly global ambitions.

The Brazilian cosmetics maker, which prides itself as a standard-bearer for sustainability, embarked on an international drive in the last decade through acquisitions that took it into Australia, Europe and Asia.

Its all-stock purchase of door-to-door seller Avon for $2bn in 2019 turned Natura into the world’s fourth largest pure-play beauty group, with a stable of four brands including The Body Shop.

But the heady days of empire building are over. Following a drawn-out share price plunge during the latter half of the pandemic and with its accounts in the red, the São Paulo-headquartered company is in for an overhaul.

Hit by squeezed consumer spending and the conflict in Ukraine, the priority now is to improve the bottom line, according to its chief executive.

“The focus is more on margins and cash flow generation rather than growth in sales,” said Fábio Barbosa, a former banker who took over last year.

Alongside a corporate reorganisation, management is reviewing Natura’s business model and presence in underperforming markets.

“Expansion programmes, geographies that you might have had in the past, we are not bringing to the table anymore,” Barbosa told the Financial Times in an interview.

Established in 1969 as a small cosmetics shop on an upmarket street in São Paulo, Natura was a pioneer of direct selling in South America, similar to one-time competitor Avon.

The company is also widely recognised for its social and environmental credentials. For more than 20 years, its eponymous brand has sourced ingredients for soaps, moisturisers and shampoos from the Amazon, where it helps preserve vast tracts of land by working with local communities.

Investors will want to see purpose once again matched with profitability. Natura’s stock has fallen 80 per cent from a peak a year-and-a-half ago, wiping about $12.5bn off its market capitalisation. Today it is valued at just R$16.9bn ($3.2bn). 

As retailers shuttered stores during the coronavirus pandemic, the personal care conglomerate initially benefited due to its direct sales and a push into ecommerce, but turnover has since shrunk.

Natura’s activities have held up fairly well in Latin America, where rivals include O Boticário. Most of the problems are concentrated elsewhere and often due to external factors, according to Itaú BBA analyst Thiago Macruz.

“What is the challenge here? The global operations are struggling a lot,” he explained. “There were some significant curveballs thrown their way”. 

At Avon, sales have been affected by the conflict between Russia and Ukraine (Natura does not own the brand in North America). Meanwhile, The Body Shop’s large store portfolio across Europe has suffered as inflation on the continent eroded disposable incomes.

This contributed to a third consecutive quarter of losses last year that took Natura’s nine-month deficit to almost R$2bn ($380mn), while revenues fell 9 per cent in constant currency terms to R$26bn ($5bn) during the period.

Financial targets have been scrapped, including cost savings that were to be gained as a result of the merger with Avon.

Management is now betting that the group’s smallest business, which has proven a bright spot amid the difficulties, will provide an important element of the turnround.

A premium cosmetics marque originally from Australia that Natura bought a decade ago, Aesop is an exception to the emphasis away from expansion. Recently it opened its first stores in China, the main growth market for luxury goods globally.

“Aesop has always been very consistent,” said Vinícius Strano, an analyst at UBS. “It’s the only brand that held up while Natura, Avon and The Body Shop were deteriorating.”

A spin-off or stock market listing is under consideration for the unit, which analysts at Itaú have estimated could be worth R$8bn.

Cash proceeds from any deal would go towards funding Aesop and could also chip away at Natura’s significant borrowings. Group-wide net debt of R$8.8bn has risen to a ratio of 2.85 times earnings before interest, tax, depreciation and amortisation.

Another pillar of the plan is a restructure of the holding company. Barbosa said this was already bearing fruit, with central function overheads slashed by at least 40 per cent. Decision-making is also being devolved from the centre down to executives running each of the four divisions.

“It is much better to delegate, for each unit to have their own reaction to the market realities where they live,” the chief executive added. “It’s the flexibility that we gave to the business units to react. They have more autonomy to make decisions with accountability.”

Whether this will be enough to revive a pair of names regarded by some analysts and consumers as old and tired will be the test.

Natura acquired The Body Shop, a British ethical retailer famous for its stance against animal testing, from L’Oréal in 2017 at an enterprise value of €1bn. The aim is a “rejuvenation” of the business, founded in the 1970s by the late campaigner Anita Roddick, while shifting it away from discounts in order to boost margins.

“We want it to go back to the connection that this company always had with society, or even being a bit ahead of society,” said Barbosa. A new store format is being rolled out, initially in the UK where there are 207 stores, with fewer products and refilling stations that avoid packaging.

The revamped premises had already registered an increase in sales, said Barbosa.

While many big corporations have abandoned Russia following its invasion of Ukraine, Avon has stayed put, maintaining a “self-contained unit” that does not import or export. Barbosa defended the decision on the grounds that it offers a source of income for its famous “Avon ladies” — self-employed sales representatives.

Another source of potential gains is through greater integration of Natura and Avon in Latin America. Barbosa, however, is not looking for an “immediate reaction” from equity investors.

“I think the market would like to see the results rather than the thinking,” he said. “The share price will react once we see the results improving”.

FT : Pandemic-hit Rolls-Royce hopes for clearer skies as new boss takes helm

Pandemic-hit Rolls-Royce hopes for clearer skies as new boss takes helm
Erginbilgic expected to deliver ‘hard-headed analysis’ of British aero-engineer as investors demand better performance

Rolls-Royce has faced its fair share of turbulence over the past two years as the British aerospace engineer came close to collapse during the Covid-19 pandemic. More upheaval is on the horizon with the arrival of new chief executive Tufan Erginbilgic.

Investors and analysts expect the 63-year-old oil industry veteran, who took over from Warren East at the start of January, to launch a strategic review alongside the company’s full-year results next month.

Rolls-Royce, whose civil engines power some of the world’s biggest jets for Airbus and Boeing, took a big financial hit from the grounding of flights during the pandemic. East embarked on a sweeping restructuring programme, including 9,000 job losses, to save £1.3bn in costs, and had to shore up the group’s balance sheet with £7.3bn of new equity and debt.

Progress has been made. The company has repaid £2bn of debt, with about £4bn of drawn debt outstanding. It is on course to have met its financial targets for last year, including generating “modestly positive” free cash flow and mid-single-digit underlying revenue growth, but it remains a long way from firing on all cylinders.

Investors want Erginbilgic, who earned a reputation as a seasoned operator with a focus on performance and driving down costs in his previous jobs at oil group BP, to attempt the same at Rolls-Royce. Improving the performance of the civil aerospace division, which still generates 40 per cent of the group’s underlying revenues, is key.

Clear priorities are reducing the losses when the company makes and sells an engine, as well as ensuring that costs taken out during the restructuring do not creep back in once volumes return as the industry’s recovery gathers pace.

The Turkish-British national has already visited Rolls-Royce’s main operations in Derby in the UK, Indianapolis in the US and Friedrichshafen in Germany, according to people familiar with the situation. A meeting with union representatives in Derby is scheduled for late January.

“He has certainly brought a sense of urgency with him,” said one of the people.

He is not afraid to stir things up at the 117-year-old company, either, demonstrated by his invite to longtime bear of the stock — analyst David Perry of JPMorgan — to deliver a presentation to the company’s senior leadership earlier this month, according to people with knowledge of the matter.

Rolls-Royce declined to comment, as did Perry when approached by the Financial Times.

In his latest analysis of the company, published at the start of January, Perry predicted that Erginbilgic would offer a “hard-headed analysis” of Rolls-Royce’s “current strategy and financial position”.

According to Perry, the company’s situation was one where the recovery in engine flying hours — a key metric and generator of cash flow as Rolls-Royce is paid by the hours that its engines are in the air — had been much slower than expected, free cash flow was also weaker than expected and its balance sheet remained strained.

“We think he will prepare investors for either further restructuring or measures to improve the balance sheet,” said Perry in the note, adding: “In short, we believe near-term pain will be needed to achieve long-term gain.” 

Simon Skinner, head of European investments at Orbis, which bought into Rolls-Royce shares in 2015, said Erginbilgic’s priority “has to be to get the company back on to a firm financial footing”. 

He believes the company could be “much more commercially sharper” and needs to make sure it receives “appropriate value for its services”. Rolls-Royce, he added, had “prioritised customer service over company profitability” and needed to find a “better balance”.

The company, which has taken out costs from its civil aerospace division, also needs to ensure they stay out as engine flying hours rise with the opening up of travel.


Large-engine flying hours have been recovering steadily but were still just 65 per cent of pre-pandemic 2019 levels in the four months to the end of October, Rolls-Royce said at the time.

The recent lifting of Covid-19 restrictions in China, however, and the reopening of Chinese airline flights, as well as those in and out of the country, will help boost flying hours.

“As China unlocks, there will be a significant snapback of air travel demand. For Rolls-Royce, China and proxy-China represented just over a quarter of total engine flight hours in 2019, pre-Covid,” said Charlotte Keyworth, analyst at Barclays.

“There is a 70 per cent correlation between engine flying hours and the company’s share price, so this unlock is significant.”

Given the difficulties that Airbus and Boeing are having in ramping up production of new aircraft amid supply chain constraints, analysts also expect that a significant number of aircraft currently in storage will be returned to service, generating revenues for Rolls-Royce. Some of these will be Rolls-Royce powered widebody aircraft such as A330s.

“Except for long-haul, civil aerospace is trending towards long-run growth again but in a difficult macroeconomic environment. A lot of the long-haul recovery is still to happen and Rolls-Royce is the purest way of pursuing that,” said Nick Cunningham of Agency Partners.

Any strategic review launched by Erginbilgic will have to consider how to position Rolls-Royce for a net zero world.

Under East, the company has invested in new business areas of electric aircraft and small modular nuclear reactors to underline the fact that the company should be seen as more than a maker of fossil-fuel burning engines. While investors believe they represent potential growth markets, they want Erginbilgic to focus on those that will make money for the company.

No imminent decision is expected on whether to divest the company’s Power Systems business whose engines propel ships and trains. Rather, the focus is expected to be on improving its operational performance first.

Other strategic questions such as finding an industrial partner for the next-generation propulsion system are also expected to be tackled at a later date.

Orbis’ Skinner admitted that “it’s been pretty bumpy” over the past seven years as a shareholder but insists that patience will be rewarded and that “decent returns” are possible. Despite the challenges, Erginbilgic’s tenure may also benefit from timing given the reopening of China.

“He could just be fantastically lucky with the market in civil aerospace,” said one industry watcher.

FT : Brazil and Argentina to start preparations for a common currency

Brazil and Argentina to start preparations for a common currency
Other Latin American nations will be invited to join plan which could create world’s second-largest currency union

Brazil and Argentina will this week announce that they are starting preparatory work on a common currency, in a move which could eventually create the world’s second-largest currency bloc.

South America’s two biggest economies will discuss the plan at a summit in Buenos Aires this week and will invite other Latin American nations to join.

The initial focus will be on how a new currency, which Brazil suggests calling the “sur” (south), could boost regional trade and reduce reliance on the US dollar, officials told the Financial Times. It would at first run in parallel with the Brazilian real and Argentine peso.

“There will be . . . a decision to start studying the parameters needed for a common currency, which includes everything from fiscal issues to the size of the economy and the role of central banks,” Argentina’s economy minister Sergio Massa told the Financial Times.

“It would be a study of mechanisms for trade integration,” he added. “I don’t want to create any false expectations . . . it’s the first step on a long road which Latin America must travel.”

Initially a bilateral project, the initiative would be offered to other nations in Latin America. “It is Argentina and Brazil inviting the rest of the region,” the Argentine minister said.

A currency union that covered all of Latin America would represent about 5 per cent of global GDP, the FT estimates. The world’s largest currency union, the euro, encompasses about 14 per cent of global GDP when measured in dollar terms.

Other currency blocs include the CFA franc which is used by some African countries and pegged to the euro, and the East Caribbean dollar. However these encompass a much smaller slice of global economic output.

The project is likely to take many years to come to fruition; Massa noted that it took Europe 35 years to create the euro.

An official announcement is expected during Brazilian president Luiz Inácio Lula da Silva’s visit to Argentina that starts on Sunday night, the veteran leftist’s first foreign trip since taking power on January 1.

Brazil and Argentina have discussed a common currency in the past few years but talks foundered on the opposition of Brazil’s central bank to the idea, one official close to the discussions said. Now that the two countries are both governed by leftwing leaders, there is greater political backing.

A Brazilian finance ministry spokesman said he did not have information about a working group on a common currency. He noted that finance minister Fernando Haddad had co-authored an article last year, before he took his current job, proposing a south American digital common currency.

Trade is flourishing between Brazil and Argentina, reaching $26.4bn in the first 11 months of last year, up nearly 21 per cent on the same period in 2021. The two nations are the driving force behind the Mercosur regional trade bloc, which includes Paraguay and Uruguay.

The attractions of a new common currency are most obvious for Argentina, where annual inflation is approaching 100 per cent as the central bank prints money to fund spending. During President Alberto Fernández’s first three years in office, the amount of money in public circulation has quadrupled, according to central bank data, and the largest denomination peso bill is worth less than $3 on the widely used parallel exchange rate.

However, there will be concern in Brazil about the idea of hitching Latin America’s biggest economy to that of its perennially volatile neighbour. Argentina has been largely cut off from international debt markets since its 2020 default and still owes more than $40bn to the IMF from a 2018 bailout.

Lula will stay in Argentina for a summit on Tuesday of the 33-nation Community of Latin American and Caribbean States (CELAC), which will bring together the region’s new crop of leftwing leaders for the first time since a wave of elections last year reversed a rightwing trend.

Colombia’s president Gustavo Petro was likely to attend, officials said, along with Chile’s Gabriel Boric and other more controversial figures such as Venezuela’s revolutionary socialist president Nicolás Maduro and Cuban leader Miguel Díaz-Canel. Mexico’s president Andrés Manuel López Obrador generally shuns overseas travel and is not scheduled to participate. Protests against Maduro’s attendance are expected in Buenos Aires on Sunday.

Argentina’s foreign minister Santiago Cafiero said the summit would also make commitments on greater regional integration, the defence of democracy and the fight against climate change.

Above all, he told the Financial Times, the region needed to discuss what sort of economic development it wanted at a time when the world was hungry for Latin America’s food, oil and minerals.

“Is the region going to supply this in a way which turns its economy [solely] into a raw material producer or is it going to supply it in a way which creates social justice [by adding value]?,” he said.

Alfredo Serrano, a Spanish economist who runs the Celag regional political think-tank in Buenos Aires, said the summit would discuss how to strengthen regional value chains to take advantage of regional opportunities, as well as making progress on a currency union.

“The monetary and foreign exchange mechanisms are crucial,” he said. “There are possibilities today in Latin America, given its strong economies, to find instruments which substitute dependence on the dollar. That will be a very important step forward.”

Manuel Canelas, a political scientist and former Bolivian government minister, said that CELAC, founded in 2010 to help Latin American and Caribbean governments co-ordinate policy without the US or Canada, was the only such pan-regional integration body which had survived over the past decade as others fell by the wayside.

However, Latin America’s leftist presidents now face more difficult global economic conditions, trickier domestic politics with many coalition governments, and less enthusiasm from citizens for regional integration.

“Because of this, all the steps towards integration will certainly be more cautious . . . and will have to be focused directly on delivering results and showing why they are useful”, he cautioned.

FT : US warns overdose crisis will spread overseas without action from China

US warns overdose crisis will spread overseas without action from China
White House drugs tsar says Beijing needs to tighten rules on supply of raw materials to make fentanyl

Washington is increasing pressure on Beijing to crack down on illegal supplies of raw materials used to make the synthetic drug fentanyl, warning the deadly overdose crisis sweeping the US could soon spread to Europe and Asia.

Dr Rahul Gupta, the White House drugs tsar, told the Financial Times it is only a matter of time before criminal cartels in China and Mexico expand their highly profitable trade in the drug, which is 50 times stronger than heroin.

He said the illicit manufacture of cheap and easily transportable synthetic drugs such as fentanyl and methamphetamine are transforming the drug market, posing a risk to global security. Only co-ordinated, international action involving China, which is a major source of the precursor chemicals used to make synthetic drugs, could thwart criminal cartels, he added.

“You can divide the world up into three categories,” said Gupta, who is the first medical doctor to hold the post of director of the Office of National Drug Control Policy.

“One, you have a fentanyl or meth problem and you know it. Second, you have a fentanyl or meth problem and you don’t know it . . . And the third, it is coming to a shore near you very soon.”

China introduced controls on two fentanyl precursor chemicals — known as NPP and 4ANPP — in 2018 following dialogue between the US Drug Enforcement Administration and Chinese government officials. But Washington’s efforts to engage Beijing are being hampered by diplomatic tensions between the two countries. In August China suspended co-operation with the US on the fight against narcotics after the visit by former House Speaker Nancy Pelosi to Taiwan.

Gupta said tackling the fentanyl crisis is one of the “top priorities” for secretary of state Antony Blinken, who is expected to travel to Beijing next month for talks with senior Chinese officials.

He said the US would also use a meeting of the UN Commission on Narcotic Drugs in Vienna in March to press China to further tighten rules on the transport of these raw materials.

“It is the criminal elements within the [People’s Republic of China] that are involved and engaged in production and shipping of the precursor chemicals,” said Gupta. “And we are going to say to the PRC this is an opportunity to demonstrate your global leadership on this issue.”

Washington is pressing China to enforce “know your end customer” regulations to ensure private businesses do not use middlemen that divert precursor chemicals to cartels. Proper labelling is required to track chemical cargoes and monitoring of shipping to ensure these are not diverted for illicit means while at sea, according to Gupta.

More than 107,000 people died in the US of overdoses in the 12 months ending August 2022, equal to one fatality every five minutes. Most of these deaths were linked to fentanyl and methamphetamine.

President Joe Biden’s administration is expanding access to opioid treatments to tackle the record number of overdose deaths and is reaching out to international partners to tackle the international supply chain.

Some US anti-drugs activists believe Beijing is deliberately allowing criminals to export precursor chemicals to Mexican drug cartels to further fuel the “overdose crisis” in the US and destabilise a competitor.

“This is a third opium war,” said Jim Rauh, founder of Families Against Fentanyl, in a reference to two wars fought by China to prevent trafficking in opium by British merchants during the 19th century.

“China had the same thing done to them and now they feel vindicated in doing this . . . This is a proxy war and without bullets being fired we are losing more people than we ever lost in wars.”

Gupta said there is no evidence to suggest Beijing is using illicit drugs as a tool to destabilise the US. But Washington did want to hold Chinese authorities accountable for the illicit actions of private criminal actors in their country, he said.

Concerns about the global spread of synthetic drugs are growing. Last month Europol warned Mexican drug cartels are becoming more active in Europe, including smuggling large amounts of meth into the bloc. The discovery of fentanyl production facilities in Europe raised concerns about “development of a fentanyl market in the EU”, according to a Europol report.

BArrons : He Might Be Tech’s Last Bull. Here’s Why the Founder of Thoma Bravo Is

He Might Be Tech’s Last Bull. Here’s Why the Founder of Thoma Bravo Is Still Buying.

Imagine everything you aspire to buy was suddenly available at 30% off. You could have an epic shopping spree. You might max out your credit cards. Because, some bargains are once in a lifetime.

That’s the situation facing Thoma Bravo, a private-equity firm with more than $120 billion in assets that invests primarily in enterprise software companies. Over two decades, Thoma Bravo has invested in more than 420 technology businesses—they currently have stakes in more than 70 companies—and they are stepping on the accelerator.

In 2022, the tech-rich Nasdaq CompositeCOMP +2.66% index fell more than 30%, with many cloud-based software companies suffering steeper declines. For a firm in the business of buying, fixing, and selling tech companies, the opportunity came loudly knocking.

In December, Thoma Bravo raised $32.4 billion in fresh capital, including $24.3 billion for its Thomas Bravo Fund XV, the single-largest tech buyout fund ever assembled. It has stockpiled cash.

In 2022, tech deals ground to a halt: The initial public offering market shut down; strategic buyers turned cautious, amid economic worries and greater regulatory scrutiny; and spiking interest rates slowed the buyout market.

The exception was Thoma Bravo. Since the start of 2022, either alone or in combination with other investors, the firm has bought or announced plans to acquire UserTesting, Nearmap, Coupa Software COUP +0.18% (ticker: COUP), Ping Identity, ForgeRock FORG +0.35% (FORG), SailPoint, Mercell, Anaplan, and Bottomline Technologies, to name a few. And there will be many more to follow.

This past week, I spoke with Thoma Bravo co-founder Orlando Bravo about private equity, software, Twitter, FTX, and several other things. Here are highlights from the conversation.

No one does more tech buyouts than you. What’s your edge?

We have the ability to turn creative innovators into great cash flow companies. Most companies we take private are great, but they’re usually not profitable. We have to generate 40%-plus Ebitda margins [earnings before interest, taxes, depreciation, and amortization] to make money at the prices we pay.

To drive up margins, you are slashing costs.

Yes, we take out costs, absolutely. There are times when a company is growing so fast that you can hold head count and grow into the margins. But in an environment like today—where we’re almost certainly facing a recession, and no one knows how deep—you are well served by decreasing costs.

With the selloff, has your approach changed?

There’s a lot more to buy. We just did this large fund raise, and the opportunity is many, many, many, many, many multiples of that.

Your model is to buy companies—and later sell them. How long do you own them?

We use four or five years as a guide. Our average holding period has been shorter—3.3 years. People ask how we can turn a company from zero margin to 40% with the existing management—that’s our secret sauce. You can make changes very quickly.

What are you hearing from portfolio companies about the outlook?

It’s not that bad. In the June quarter, purchasing managers were really pulling back. The September quarter was soft. But the December quarter was pretty decent. I feared the fourth quarter was going to be surprisingly bad, and it was not. I didn’t see anything nearly as bad as what we saw in the financial crisis, or what we saw in the first two quarters of Covid in Q1 and Q2 of 2020.

What’s happening on the exit side?

Not much. As an organization, we’ve never been afraid to sell. But right now there’s just not much going on. This past year we sold most of Veracode, to TA Associates. We sold Frontline, an education software company, to Roper Technologies ROP +2.18% (ROP). And we sold Kofax to Clearlake Capital and TA. But nothing in the last six months.

Do you see the software IPO market reopening soon?

Software companies that are 20% growers are trading at five times ARR [annual recurring revenue]. I’m not sure venture-backed companies want to go public at that level which might be a markdown from the last two to three rounds. The other question is whether investors want the same kind of companies where they just lost 80%. Investors are going to want high margins, reasonable prices, and good growth.

Did you bid for Twitter?

We looked at it seriously. If you just looked at the metrics, it looked like a Thoma Bravo deal, at around seven times forward revenue, growing around 15%. It had Ebitda, and a huge operating opportunity. But when we buy an enterprise software company, we have an exact plan on how we can create value. Here, we didn’t know how. Is it an extremely valuable company for society? It sounds like it. But that doesn’t necessarily translate into being an extremely valuable company as an investment. We didn’t make a formal offer.

Finally, I have to ask about your investment in FTX.

It was obviously a mistake. And we have personally apologized to investors in our growth fund. It wasn’t a large investment—$100 million—but it was a big mistake and an embarrassing one. It wasn’t a diligence mistake. Diligence mistakes are when you miss a lawsuit, or you miss a trendline. This was a judgment mistake. I said even before the issues at FTX that we’re not going to make any more crypto investments, because I was not loving the business practices we’re seeing in crypto.

Barrons : This Steel Maker Is Looking to Defy a Recession. That Could Drive the

This Steel Maker Is Looking to Defy a Recession. That Could Drive the Stock Higher.

Manufacturers are a bellwether for global economic health—when demand slumps, so does production.

ArcelorMittal , the world’s second-largest steel maker by volume, with facilities in 16 countries on five continents, has faced severe headwinds the past year as the cost-of-living crisis caused consumers to rein in spending. In addition, the company has had to navigate Covid-19 lockdowns in China, which caused companies to scale back production.

The stock (ticker: MT.Netherlands) has fallen 8.6% to 28.90 euros ($31.25) over the past 12 months, and the prospect of a recession in 2023 will make it a tough year. But this could prove to be a buying opportunity because ArcelorMittal is using its scale, its geographical spread, and its focus on growth markets to defy the odds.

Access to gas to power factories and offices is a key issue. And while Russia’s war in Ukraine hit gas supplies in Europe, ArcelorMittal has facilities spread across eight countries, which mitigates this impact. Energy is a big overhead, but prices have fallen and the steel maker stands to benefit because it had the foresight to not hedge its energy costs in the fourth quarter.

The business will also have the advantage of a series of self-help measures. During its third-quarter update, it said it had cut gas consumption in Europe by 30% and is also scaling back production.

It has shut down six megatonnes of capacity, or 15% of its total capacity, in Europe, according to a recent note by ODDO BHF analyst Maxime Kogge, who remains an ArcelorMittal bull but has scaled back forecasts for projected earnings before interest, taxes, depreciation, and amortization, or Ebitda, to $6.6 billion from $8.2 billion for 2023.

He is sticking with an Outperform rating on the stock, which he estimates could rise 25% to €35. The recovery is likely to come earlier in Europe, where market prices “have probably bottomed out,” he says.

He added that “the group’s solid fundamentals are unchanged,” and noted its strong cash generation and high level of returns to shareholders.

Deutsche Bank’s Bastian Synagowitz has a price target of €32.23, writing in a recent note, “ArcelorMittal holds potential for a strong rebound once steel markets bottom out, and although volatility is likely to remain elevated, we reiterate Buy.”

The company, which is a large supplier to the automotive industry, accounting for 12% of sales, has a market value of €23 billion and employs 157,909 workers. It fetches a multiple of 8.8 times this year’s expected earnings and is valued in line with its peers.

For the half year through June 2022, Ebitda jumped to $10.2 billion from $8.3 billion for the same period the year before. Sales in the period also increased, to $44 billion from $35.5 billion.

“The short-term outlook for the industry remains uncertain and caution is appropriate,” CEO Aditya Mittal tells Barron’s. The company has a strong balance sheet, he adds, and “we will continue to focus on executing our strategy, designed to ensure our long-term sector leadership, as well as deliver sustainable investor returns.”

Arcelor’s Kryvyi Rih plant in Ukraine has been affected by Russia’s war. It resumed producing some crude steel in April. There was a setback in December after it was shelled, but damage was minimal.

More solid upside could come from ArcelorMittal’s mining arm. While this isn’t a core business, only contributing 13.3% of group Ebitda, the price of iron has bounced back. “Mining should prove more resilient,” Kogge says.

Barrons : A Recovery in China’s Property Market? Not So Fast.

A Recovery in China’s Property Market? Not So Fast.

Three red lines? What three red lines?

China’s stunning policy U-turn hasn’t excluded real estate, which in better times powered a quarter of the No. 2 economy. Developers, who the government decided two years ago were overleveraged, were supposed to comply with the three infamous financial limitations by June 2023. Authorities are easing back that deadline now, if not junking it altogether. “Forestalling and defusing risks in the sector is the bottom line,” housing minister Ni Hong said recently.

Beijing has backed that dovish line with a raft of stimulus measures: soft credits for beleaguered builders, lowering mortgage rates and requirements. Investors like it. The Global X MSCI China Real Estate exchange-traded fund (ticker: CHIR) has gained 60% from a trough in October. Developers’ dollar bonds have done better than that, erasing most of the past year’s losses, says Tracy Chen, a portfolio manager for global credit at Brandywine Global.

If you blinked through this rally, you might have missed it, unfortunately. More volatility is likely to come. “The market is probably running ahead of itself,” Chen says.

Beijing may have handed its traumatized real estate sector a shovel. Digging out still won’t be easy. Builders defaulted on 140 different bonds worth $50 billion last year, Bloomberg reported. Housing prices, which increased 80-fold over two decades, have fallen for 15 straight months.

Recovery will require buy-in from a chain of now gun-shy market players, Chen says. Banks are reluctant to lend to developers, despite official exhortations. Developers are reluctant to buy land for new building. State-owned developers are slow-walking buyouts of flailing private peers to consolidate the market.

Most important, consumers have seen that prices can fall as well as rise, and won’t be in a rush to buy again. “The key is confidence, which is still weak for now,” says Larry Hu, chief China economist at Macquarie Group.

The state retains its long-term goal of easing China’s property addiction, and shifting supply from the most profitable luxury developments to subsidized affordable ones. It aims to staunch the sector’s bleeding without reigniting “wild speculation,” says Michael Kelly, head of PineBridge Investments’ multi-asset strategy.

Concretely that means targeting support to a dozen or so “quality developers,” and letting the rest fend for themselves. “A lot of private developers will go through restructuring,” Kelly says. “Maybe 20% will restructure to the point of not getting your money back.”

Some of the deserving quality developers are already telegraphed, including No. 2 China Vanke (2202.Hong Kong) and No. 6 Country Garden Holdings (2007.Hong Kong). Investors are still guessing at others, always a risky business in China.

Rising valuations are decreasing the offsetting rewards for such tea-leaf reading. Kelly estimates the average yield on his portfolio of “money good” Chinese developers’ bonds has dropped from 15% to 11% within the past month or so. It’s now about four percentage points better than what he projects for U.S. high-yield paper this year. “The trade is no longer crazy attractive,” he says.

Developers’ stocks he finds not attractive at all. Those stocks are a sliver of China’s equity market, but a bellwether for the economy. Property accounts for 70% of Chinese households’ net worth, by some estimates.

The country’s vaunted reopening will only go so far if the housing market can’t find a durable footing. Xi Jinping’s people haven’t found it yet, though they are trying.

Barrons : Activist Investors Will Keep Targeting Big Tech

Activist Investors Will Keep Targeting Big Tech

Don’t expect activist investors to lose their appetite for big-tech companies in 2023.

Last year, tech was the most targeted sector for U.S. activists, accounting for 27% of campaigns—well above the historical average of 16%, according to Lazard data. No target was too big: Meta Platforms META +2.37% (ticker: META), Salesforce CRM +3.31% (CRM), and Alphabet GOOGL +5.34% (GOOGL) were just some of the names in the crosshairs in 2022. And the new year already brought a fresh target with Chewy CHWY +3.58% (CHWY) co-founder Ryan Cohen targeting Chinese internet giant Alibaba Group Holding BABA +2.81% (BABA).

Market volatility is one of the reasons for targeting tech, whose sky-high valuations crashed last year, or at least settled into a lower orbit, creating a wealth of opportunity for activists.

“When we look at the overall sector penetration, tech is a large percentage of the public company universe,” Mary Ann Deignan, managing director and head of Capital Markets Advisory at Lazard, tells Barron’s. “You could look at tech and say there’s a lot of places to go for tech campaigns—a lot of untouched companies.”

But there’s more to it than that. While it’s true that market volatility may reveal new opportunities, activists also have to be careful about protecting their own portfolios in down periods. Large, popular tech names offer less trading risk than lesser-known companies, should an activist decide to make a quick exit.

“These very large names have more liquidity,” says Deignan. “When markets are volatile, liquidity is your friend.”

Barrons : Ferrari Is Shifting Into High Gear. Buy Its Stock.

Ferrari Is Shifting Into High Gear. Buy Its Stock.

Not everyone has a chance to get behind the wheel of a Ferrari in their lifetime, let alone own one, but anybody with a brokerage account can buy shares in the storied supercar maker. Now is a good time to take a ride.

With a promising near-term outlook followed by a coming transition to electric vehicles that should juice sales volumes, Ferrari shares (ticker: RACE) appear set to shift into higher gear in 2023.

RBC Capital Markets analyst Tom Narayan sees revenue almost doubling for Ferrari, and a key earnings measure nearly tripling by 2030.

Driving a Ferrari isn’t like driving a Chevrolet, and buying Ferrari stock isn’t like buying shares of a mass-market auto maker—it requires investors to stomach a steep valuation premium to other auto makers.

“One doesn’t buy a Ferrari just to go from A to B,” says Brian Lum, a portfolio manager at Baillie Gifford, which owns 5% of Ferrari shares. “This isn’t a car company, this is a luxury company that happens to make cars.”

It means wider profit margins, less cyclicality, and faster growth than mass-market auto makers—which supports a higher valuation multiple. The bulls argue that Ferrari stock should trade more like LVMH Moët Hennessy Louis Vuitton (MC.France), Kering (KER.France), Richemont (CFR.Switzerland), or Hermès International (RMS.France) than General Motors (GM) , Toyota Motor (TM), or Volkswagen (VOW3.Germany).

Like the makers of luxury clothing or watchmakers, Ferrari intentionally underproduces relative to demand to drive scarcity and price at a premium. The company’s gross profit margin exceeds 50%, versus 20% or less at GM and others. Waiting lists for new Ferrari models are long, making sales more consistent than at mass-market auto makers sensitive to the vagaries of the global economy.

Like a Birkin bag or a Patek Philippe timepiece, limited-edition Ferraris tend to appreciate in value over time. And brand loyalty is high—the company says that more than 40% of Ferrari owners own more than one. Deep-pocketed customers and more demand than supply gives Ferrari pricing power, insulating earnings from inflation and the negative impact of a recession.

Bernard Arnault’s LVMH goes for about 24 times forward earnings, Gucci and Saint Laurent parent Kering trades for 16 times, Cartier owner Richemont for 20 times, and Hermès for 47 times. At a recent 221 euros ($239), the Milan-listed Ferrari shares were at 36 times the coming year’s consensus earnings, having traded between roughly 30 times and 50 times over the past year and a half. Most auto makers— Tesla (TSLA) excepted—trade for mid-single-digit multiples of earnings forecasts.

Adjusted for expected long-term growth—the stock’s multiple divided by annual growth in earnings before interest and taxes, or Ebit, through 2030—Ferrari trades for less than Hermès and LVMH and at slight premiums to Richemont and Kering.

That expected growth comes from several new model launches planned for the coming years, powered by gas, hybrid, and all-electric drivetrains, and continued price increases. Ferrari’s first sport-utility vehicle, the Purosangue, is expected to hit the market in 2023.

The Purosangue is hardly a Chevy Suburban—it’s more like a slightly taller sports car with four seats, four doors, and a trunk capacity of only 17 cubic feet. It will pack a 725-horsepower V-12 engine that can propel a happy family from 0 to 60 miles an hour in 3.3 seconds.

Unlike rivals such as Lamborghini, which said that its Urus SUV made up some 5,000 of the 8,500 units it sold in 2021, Ferrari has promised to cap output of the Purosangue at 20% of annual production to maintain exclusivity and keep the brand image.

The Purosangue reportedly sold out in weeks in the fall, with deliveries not beginning until around the middle of this year. Ferrari’s plant in Maranello, Italy, has a capacity of up to 15,000 vehicles a year, suggesting no more than 3,000 SUVs will be sold annually. That could still make it one of Ferrari’s most popular models, alongside the $260,000 F8 Tributo and $225,000 Roma. But the Purosangue, Italian for “thoroughbred,” will start at $421,000.

Also helping to boost average sales prices in 2023 will be the limited-edition Daytona SP3, which goes for more than $2 million. Ferrari could deliver about 150 of those 840-horsepower beasts this year.

Thanks to Ferrari’s order book, 2023’s growth is pretty much guaranteed. Analyst consensus calls for a 22% increase in earnings per share this year, to €6.11, on revenue of €5.6 billion, which would be up 11%.

Beyond 2023, there’s the transition to electric vehicles—an impetus for change where Ferrari does resemble other auto makers. It is building a new production line in Maranello specifically for EVs and is targeting deliveries of its first fully electric model in 2025. As with the Purosangue, those will be greatly anticipated, supporting further price increases.

Narayan’s model has Ferrari delivering 20,000 cars in 2030, up from about 13,000 in 2022. Management is targeting a lineup of 20% internal combustion engine, 40% hybrid, and 40% all-electric vehicles in 2030.

By then, Narayan expects revenue to almost double to 8.8 billion euros, and for Ebit to reach €3.3 billion, up from €1.2 billion last year. He rates Ferrari stock at the equivalent of Buy, with a price target of €265 on the Milan-listed shares—roughly 20% upside.

“You have this double whammy of pricing power in addition to volumes,” he says. “That’s why the growth story here is really, really compelling.”

>>> Barron’s Weekend Summary

Barron’s Weekend Summary: This week’s cover features four panelists who participated in the 2023 Barron’s Roundtable


Cover Story:
-This week’s cover features four panelists who participated in the 2023 Barron’s Roundtable: Delphi Management’s Scott Black, Gamco Investors‘ Mario Gabelli, Epoch Investment Partners’ William Priest, and Abby Joseph Cohen, a longtime strategist at Goldman Sachs and now a professor of business at Columbia University’s Graduate School of Business. Collectively, they scoured the markets and dug deep to find 26 companies, both familiar and obscure, whose shares are poised to shine in the year ahead. Overall, the Rountable featured 10 participants, who were divided in their market outlook when the group met in New York on Jan. 9. Some expect stocks to lose further ground as the Federal Reserve hikes interest rates, likely pushing the economy into a recession in the back half of 2023. Others think the Fed will cease its exertions sooner rather than later, declaring inflation sort of tamed and paving the way for a market rebound.

Interview:
-No interview this week

Tech Trader:
-For over two decades, Thoma Bravo has invested in more than 420 technology businesses. They currently have stakes in more than 70 companies, and they are stepping on the accelerator. In 2022, the tech-rich NASDAQ Composite index fell more than 30%, with many cloud-based software companies suffering steeper declines. For a firm in the business of buying, fixing, and selling tech companies, the opportunity came loudly knocking. In December, Thoma Bravo raised $32.4B in fresh capital, including $24.3B for its Thomas Bravo Fund XV, the single-largest tech buyout fund ever assembled. It has stockpiled cash. In 2022, tech deals ground to a halt: The initial public offering market shut down; strategic buyers turned cautious, amid economic worries and greater regulatory scrutiny; and spiking interest rates slowed the buyout market. The exception was Thoma Bravo. Since the start of 2022, either alone or in combination with other investors, the firm has bought or announced plans to acquire UserTesting, Nearmap, Coupa Software, Ping Identity, ForgeRock, SailPoint, Mercell, Anaplan, and Bottomline Technologies, to name a few. And there will be many more to follow.

The Trader:
-Compass resembles a publicly traded middle-market private-equity firm, which buys, holds, and sells a portfolio of businesses in niche industrial and consumer markets. Its 11 subsidiaries sell everything from baseball bats, to diamonds, to foam packaging and insulation, to baby carriers. Altogether, Compass should generate about $2.2B in sales and adjusted Ebitda—short for earnings before interest, taxes, depreciation, and amortization—of about $465M in 2022. The company has a market capitalization of about $1.5B. Compass’ portfolio has evolved over time. Its management is shifting money toward faster-growing businesses, rather than cash cows that may generate more sales today, but operate in mature markets with less growth potential.
-Sometimes, being a value investor means going where others prefer not to go. For some, that means wading into controversial situations in which a business is unloved due to past transgressions. That describes Wells Fargo and Walt Disney, says Aaron Dunn, co-head of the value equity team at Eaton Vance. Wells Fargo, which dropped 1.1% this past week, has been subject to a Federal Reserve-mandated asset cap since 2018 and has paid fines to settle charges of illegal conduct. Its recent earnings report revealed that profits had been cut in half. But the stock trades for nine times 2023 estimated earnings and one time book value, versus about 10.5 times and 1.4 times, respectively, for JPMorgan Chase, which lacks the same drama—and that makes it attractive. “There’s a lot of internal change and cost cutting that the management team is bringing in [at Wells Fargo], and you have a relative-valuation tailwind,” says Dunn, who co-manages the Eaton Vance Value Opportunities fund.

Features:
-Several stocks highlighted in Barron’s fell victim to the same dynamics that sunk the broader market—inflation, high interest rates, and supply-chain slowdowns. But overall, its bullish picks fared better than their benchmarks in 2022. From the date of publication through the end of the year, Barron’s names fell 4.8%, while the indexes they are tracked against fell 5.2%. Its two bearish calls hit the mark, too, falling far more than their benchmark. Barron’s follows the performance of its stock picks throughout the year, to allow readers to see how well our predictions work out versus the S&P 500, or the S&P MidCap 400, or the Russell 2000 , depending on company size.
-Americans are flocking to electric vehicles (EV), pushing sales up 127% over the past two years. To encourage the EV market, the US Federal government is offering a tax credit of up to $7,500 for EVs and other “clean vehicles,” including plug-in hybrids. But to qualify, buyers will have to untangle a myriad of eligibility rules. Dealers aren’t likely to sell for anything below sticker price. And note that additional rules are expected from the Internal Revenue Service in March—cutting or eliminating credits for some models. “If you want an EV, now is the time to go after it,” says Ingrid Malmgren, policy director for Plug In America, an EV advocacy group.
The credit rules, revised under the Inflation Reduction Act, are a hash of good and bad news for buyers. One positive change is that models from General Motors and Tesla now qualify. The government no longer has an eligibility cap of 200,000 EV sales—a provision that restored the credits for GM and Tesla. Tax breaks are also available for plug-in hybrids like the Audi Q5 PHEV and BMW 330e. And, for the first time, you can get a credit on used cars.

European Trader:
-ArcelorMittal, the world’s second-largest steel maker by volume, with facilities in 16 countries on five continents, has faced severe headwinds the past year as the cost-of-living crisis caused consumers to rein in spending. In addition, the company has had to navigate Covid-19 lockdowns in China, which caused companies to scale back production.
The stock has fallen 8.6% to 28.90 euros ($31.25) over the past 12 months, and the prospect of a recession in 2023 will make it a tough year. But this could prove to be a buying opportunity because ArcelorMittal is using its scale, its geographical spread, and its focus on growth markets to defy the odds. Access to gas to power factories and offices is a key issue. And while Russia’s war in Ukraine hit gas supplies in Europe, ArcelorMittal has facilities spread across eight countries, which mitigates this impact. Energy is a big overhead, but prices have fallen and the steel maker stands to benefit because it had the foresight to not hedge its energy costs in the fourth quarter.

Emerging Markets:
-China’s stunning policy U-turn hasn’t excluded real estate, which in better times powered a quarter of the No. 2 economy. Developers, who the government decided two years ago were overleveraged, were supposed to comply with the three infamous financial limitations by June 2023. Authorities are easing back that deadline now, if not junking it altogether. “Forestalling and defusing risks in the sector is the bottom line,” housing minister Ni Hong said recently. Beijing has backed that dovish line with a raft of stimulus measures: soft credits for beleaguered builders, lowering mortgage rates and requirements. Investors like it. The Global X MSCI China Real Estate ETF has gained 60% from a trough in October. Developers’ dollar bonds have done better than that, erasing most of the past year’s losses, says Tracy Chen, a portfolio manager for global credit at Brandywine Global.

Commodities:
-Energy exploration and production company EOG Resources had a bullish 2022, and one of its directors made his second purchase of shares in three months. EOG stock surged 46% last year, lifted by rising oil prices. The company also announced a strong third quarter in November, along with a higher dividend. “EOG is in a better position than ever to deliver value for our shareholders and play a significant role in the long-term future of energy,” the company said. On Jan. 12, EOG director Mike Kerr paid $2.6M for 20,000 shares, at an average price of $130.49 each. According to a filing with the Securities and Exchange Commission, Kerr purchased the shares through a family trust that now owns 170,000 EOG shares. Kerr also owns 10,854 EOG shares through a personal account.

Streetwise:
-This week, Jack Hough talks about Davos, which, he complains, is a ski-resort and, therefore, is not very dress-shoe friendly. Hough does mention that there were plenty of substantive talks with companies about business conditions, growth strategies, and how investment do-goodism is evolving. At a Barron’s event, a private-equity CEO responded to our critical coverage of his real estate fund. Another described how she has turned skepticism around scorekeeping used in social-conscience investing into a revenue opportunity. Frédéric Lissalde, who runs BorgWarner, talked about a planned spinoff of a NewCo to sell fuel injectors and other systems tied to gasoline and diesel. The remaining company, still called BorgWarner, would be more focused on systems for electric vehicles, as well as drivetrains for fuel burners, where know-how can be put toward battery propulsion, too.