TheChek News Flow

EMLyon signals shake-up in system with initial €40m sale

One of France’s leading business schools has sold stakes to two external investors, in the first sign of a significant shake-up in the control of the country’s elite business education system.

EMLyon Business School, Lyon’s main MBA provider, has sold an initial 14 per cent each to the state-linked Qualium Investissement and Bpifrance Investissement for a total of €40m, diluting the control of the region’s chamber of commerce.

It plans to offer further stakes to both investors as well staff and alumni in the future to raise €100m, reducing the chamber’s stake over five years to 48 per cent.

Tawhid Chtioui, the dean, said the decision would help support its relocation to a new city-centre campus, and plans to acquire an engineering and a design school to create a more interdisciplinary approach to teaching business.

“Our ambition is to be one of the top 10 European business schools,” he said, stressing that its values were very important and would be safeguarded by golden shares to ensure continued oversight by the Chamber of Commerce.

The move comes at a time when many of the country’s prestigious “écoles de commerce” are considering selling shares, among other approaches, as they seek fresh money in the face of intensifying competition and the erosion of their traditional state-backed support.

HEC, Essec and ESCP Europe in Paris, and Grenoble Ecole de Management, Toulouse Business School and Neoma Business School, are all also exploring ways to raise funds while retaining academic quality and respecting the continued desire of their regional chambers of commerce to retain oversight.

The changes reflect the cuts in funding from France’s local chambers of commerce, which have authority to levy taxes on business and have traditionally created, funded and overseen “grandes écoles” to train future managers.

The schools in turn have served an elite of French students who typically enter via a highly competitive entrance exam after studying in specialist preparatory schools.

However, applications to these “prepa” classes have stagnated, while government reforms have squeezed taxes going to the chambers of commerce, leaving business schools struggling to find other income for buildings, faculty recruitment and other investments.

French business schools will either have to find new funding sources or raise their tuition fees significantly, according to Jean-Pierre Choulet, director of development and alumni at Henley Business School, who spent 20 years in senior roles at Paris-based Essec. “Business education in France needs a new [business] model,” he said.

Frank Bournois, head of ESCP Europe, which is also exploring share sales, said: “Never in the history of French business schools has there been so much happening in so little time with so many challenges of governance, digitalisation and the internationalisation of students and faculty.”

He stressed the importance of seeking investors such as corporate philanthropic foundations who “have ethics and are not greedy”, to maintain quality.

Industry warns Trump tariffs could lead to more redundancies in coming months

US retailers are warning that President Donald Trump’s new round of trade tariffs threatens to accelerate lay-offs as figures show it is the only sector of the economy to have shed jobs in the past two years.

After a wave of bankruptcies and store closures, data published on Friday showed the retail trade employed 49,000 fewer people last month than in July 2017. Department store, clothing chain and electronics retail workers bore the brunt of the cuts, and the aggregate job losses in the sector would have been higher were it not for hiring by grocers and car dealerships.

In a sign of how the relentless rise of Amazon is transforming the labour market, retail has missed out on an employment boom in other industries. Transport and warehousing added about 370,000 positions over the two-year period, according to the figures from the Federal Reserve Bank of St Louis and the US Bureau of Labor Statistics.

Retail employees are braced for more redundancies in the months ahead. Mr Trump last week said he planned to impose 10 per cent tariffs on $300bn worth of Chinese imports from next month, just as the industry prepares for the crucial Christmas shopping season.

“If you’re bringing in less income and consumer demand starts to go down, there’ll be less reason to employ people,” said Matt Priest, head of the Footwear Distributors and Retailers of America trade body.

Retail analysts stopped short of warning that the latest tariffs would necessarily lead directly to widespread redundancies across the sector. The 10 per cent tariffs are lower than the 25 per cent previously threatened.

However, they warned the additional costs would prove too much for weaker outlets already operating on razor-thin margins and grappling with other pressures from changing consumer tastes and online shopping.

“For those companies that are a bit shaky, this is going to push them over the edge faster,” said Julia Hughes, president of the United States Fashion Industry Association.

Job losses in retail have been driven by bankruptcies of big employers including Sears as well as cost cutting and store closures by others such as Macy’s.

Lowe’s last week put thousands of employees on notice for possible job cuts. The DIY chain said it planned to outsource janitorial work, among other positions, to contractors.

Employment market data published on Friday showed the retail trade lost another 3,600 positions at a seasonally adjusted rate in July.

Within retail, department stores and electronics and appliance stores let go of a net 3,700 and 5,700 employees respectively. Hiring by grocers, which have been less hard hit by internet shopping in the US, offset some of the losses.

Every other main sector of the economy added jobs over the two-year period apart from utilities, where employment was unchanged. Industries from professional services to healthcare continued a hiring spree last month. 

Retailers had put warnings over more job losses at the forefront of their lobbying campaign to convince the White House to avoid escalating trade tensions with Beijing.

In testimony earlier in the summer to the Office of the United States Trade Representative after Mr Trump threatened to impose the 25 per cent tariffs, executives said they would be forced to slash costs and also push up prices in response. 

Gary Wakley, senior vice-president for footwear sourcing at sportswear company Fila USA, said it would be Americans who “will be the ones to get the pink slips”, a reference to job cuts.

Wade Miquelon, chief executive of Jo-Ann Stores, an Ohio-based fabric and crafts chain with about 870 stores and 23,000 employees, said: “Our company will face tough decisions that could include job eliminations and store closings.”

While retailers have been trying to deal with existing tariffs by shifting sourcing away from China and pushing suppliers to absorb their share of the costs, the industry is warning that the new wave could be harder to manage since it includes a wide range of consumer goods such as trainers that have so far been excluded.

Shares in several of the country’s biggest retailers including Best Buy, Gap and Macy’s sold off heavily last week after Mr Trump issued his latest tariff threat.

Smaller operators are also worried. Trey Kraus, who runs Carltons, a clothing store in Delaware, said he and his wife — who co-own the business — would absorb the resulting hit to margins themselves before they resorted to job cuts. But he added: “Believe me, if you’ve got shareholders involved, jobs will be cut.”

Is it time to turn away from TINA?

TINA, of course, is the acronym for There Is No Alternative, in this case to common stocks, especially U.S. equities. Low interest rates make bonds unattractive and risky, according to this line of thinking, Alternative investments, such as private equity and hedge funds, are TINA’s version of a private dancer, promising an exclusive performance for those sufficiently well-heeled to pay for it. For us hoi polloi who are guided by a typical financial advisor or who let their fingers do the walking on keyboards to their online brokers, listed stocks or funds are TINA.

But TINA has a rival in TIAA, as in There Is An Alternative. And it’s U.S.-dollar cash equivalents, according to JPMorgan’s Global Markets Strategy team, led by Nikolaos Panigirtzoglou.

Even after the quarter-point reduction in the Federal Reserve’s target range for overnight federal funds, to 2%-2.25%, those equivalents compare favorably to the fixed-income alternatives available elsewhere, where yields have been crushed by investors’ headlong rush into bonds. That puts them at risk for credit downgrades, or the potential of steep price declines if yields rise from their current historic lows.

That stampede has been motivated, in no small part, by the burgeoning of bonds with negative yields; in other words, paper that guarantees investors will receive less than their original investment.

To Julian Emanuel, BTIG’s chief strategist, this suggests perhaps the biggest bubble in history. German 10-year bund yields at minus 0.40%, 100-year Austrian bond yields at 1%, 10-year Italian bonds at 1.60%, and equivalent U.K. gilts at 0.60% recall some of history’s great investment bubbles. Among those of recent memory: the Japanese stock market in the 1980s, the dot-com bubble of the 1990s, and U.S. residential real estate in the previous decade.

What’s different this time (always a dangerous phrase in financial markets) is that global bonds’ thoroughly irrational valuation is a result of central banks’ imposition of low or negative interest rates, as Mark Grant, chief global strategist for fixed income at B. Riley FBR, constantly reminds readers of his Out of the Box missives. That’s created a Wonderland more bizarre than the one Lewis Carroll conjured.

Even with low and negative bond yields, though, it might not be the season for TINA. As the past week’s price action demonstrated, we’re heading into what historically has been the stock market’s version of hurricane season.

According to the Stock Trader’s Almanac, in years preceding presidential elections since 1971, the July-October span marked the worst four months. The Dow Jones Industrial Average and the S&P 500 index have tended to peak in July, bounce around in the next couple of months, and drop in October, ending with losses by Halloween.

But according to the same data, the Dow and S&P 500 then rallied into year-end.

The same pattern also is seen in the Nasdaq Composite, but with even wider swings and an even bigger surge into New Year’s. So the question is where to hide out for now. There are lots of credible calls for still lower bond yields, notably by longtime bond bull A. Gary Shilling, who ultimately sees the Treasury’s 10-year note hitting 1% (down from 1.85%) and the 30-year bond reaching 2% (down from 2.41%).

In the short term, however, just a small reversal from current (high-price, low-yield) levels could be painful. For those playing at home in the popular iShares 20+ Year Treasury Bond exchange-traded fund (ticker: TLT), a return to mid-May’s levels would translate into a 7% loss, equal to a roughly 1,800-point drop in the Dow.

Not exactly a haven.

Those who have practiced what they thought was a safe relationship with TINA through “bond proxies” shouldn’t be complacent. Société Générale strategist Andrew Lapthorne points out that the global stocks most correlated with bonds have vastly outperformed the least correlated. But these proxies provided scant protection in the Great Financial Crisis of 2008-09, as their profits plunged 30%-40%—less than the 60%-plus drop for cyclicals, but painful enough, he adds.

BTIG’s Emanuel similarly observes that bond proxies, such as utility shares and even software stocks (recently viewed as members of this cohort) have benefited in this environment. But given the euphoria in global bond markets, they could be vulnerable, he writes in a client note.

He recommends buying put options (which increase in value as prices of the underlying asset declines. (For another view on options, see The Striking Price column.) Specifically, he likes September 60 puts on the Utilities Select Sector SPDR (XLU) with the ETF trading at $60.16, and November 220 puts on the iShares Expanded Tech-Software Sector (IGV) with the ETF changing hands at $221.76.

Those are worthwhile ideas for traders. For longer-term investors, JPM’s Panigirtzoglou suggests that cash is a worthwhile alternative to TINA. The Vanguard Federal Money Market fund (VMFXX) has a seven-day yield of 2.23%, more than half again that of global bonds. More important, it provides a magazine of dry powder to put to work if risk assets swoon from their current highs amid the markets’ mounting dangers.

Apple bulls swooned last week over the company’s better-than-expected reported earnings. All it took was a return to revenue growth after two quarters of declines. The definition of success has changed for the iPhone maker, which spent a decade growing sales more than 20% a year on average.

A return to sales growth in the latest quarter was an important inflection point for Apple (ticker: AAPL), but the negativity could return as investors dig into the underlying realities.

On Tuesday, Apple reported June-quarter revenue of $53.8 billion, up 1% year over year and above the consensus forecast of $53.3 billion. Earnings per share were $2.18, down from $2.34 the prior year but higher than the $2.09 average analyst estimate. The shares rose 2% the following day, with multiple analysts raising their Apple stock price targets.

The upside came from surprising areas. Sales from the Mac business beat Wall Street’s estimate by about $400 million, while the Wearables, Home, and Accessories operation crushed estimates by $700 million. That segment includes the Apple Watch and AirPods. While the tech giant doesn’t disclose sales in the segment, Cook did say last week that wearables grew “well over 50%” in the quarter. AirPods sales probably benefited from a revised version released in late March.

But investors should be careful in evaluating the shifting narrative. The long-term driver of Apple shares has been excitement about the company’s services businesses. The stock move is clear on that: Apple is up nearly 30% this year, even as iPhone sales have declined markedly.

The stock now trades at 16.4 times projected earnings for the next 12 months, well above its five-year average of 13.7 and near a five-year peak of 17.7. Investors have been paying up for the stock on the idea that Apple is moving away from its hardware focus toward a more predictable services- and software-driven model.

The problem is that Apple’s services business remains a question mark and could still disappoint. The segment actually missed analyst estimates by $200 million in the June quarter, with sales up 13% year over year, versus 16% in the prior quarter.

Moreover, KeyBanc Capital Markets Andy Hargreaves expects Apple’s services growth rate to subside over the next year. “Services business is tied to growth in the user base,” he says. “And the user base is definitely decelerating.”

The dynamic puts even more pressure on Apple’s next wave of services, expected to be launched by the end of the year, including Apple TV+ (video subscription), Apple Arcade (gaming subscription), and Apple Card (credit card). In each area, Apple is joining a crowded field. “What Apple is offering is not going to be better than what’s in the market,” Hargreaves says.

Amid the excitement about wearables, iPhone sales came in below expectations for the quarter. The iPhone’s revenue of $26 billion missed the Street consensus by $300 million, with sales down 12% year over year. IPhone unit sales, which Apple no longer discloses, might look even worse. IDC estimates that iPhone unit shipments were down 18% year over year in the quarter, the worst showing among the top five global smartphone makers. Apple didn’t respond to a request for comment on IDC’s data.

“The core controversy of normalized iPhone growth remains unresolved,” Bernstein analyst Toni Sacconaghi wrote on Wednesday. “We remind investors that iPhones are still down, [and] big questions about replacement cycles [are] still outstanding.”

Apple’s new iPhone lineup, due this fall, is unlikely to change the story significantly. “This [coming] cycle, I believe, will be challenging, as I am not expecting dramatically new designs,” Patrick Moorhead, principal analyst at Moor Insights & Strategy, wrote in an email.

And then there’s trade. Apple is arguably more exposed to China than any other large U.S. tech firm.

On the recent earnings call, CEO Tim Cook downplayed reports that the company is moving production out of China, where it largely manufactures its products, to avoid potential tariffs. “There has been a lot of speculation around the topic,” he said. “I wouldn’t put a lot of stock into those.”

Apple is clearly worried about tariffs, however. In June, it sent a letter to U.S. Trade Representative Robert Lighthizer, noting that the next round of proposed tariffs would hurt it because it would cover all of Apple’s major products, including the iPhone, iPad, Mac, and AirPods. “We urge the U.S. government not to impose tariffs on these products,” Apple wrote. “U.S. tariffs would also weigh on Apple’s global competitiveness.”

The letter wasn’t convincing enough. On Thursday, President Donald Trump announced plans to impose a 10% tariff on Sept. 1 covering $300 billion in imports from China—including Apple’s key products. Investor reaction was swift; Apple closed down 2% on Thursday and another 2% on Friday, to $204.02.

While the latest tariffs may just be a negotiating tactic, any possibility of trade levies doesn’t seem reflected in Apple stock.

So where do Apple shares go from here?

In early January, a few days after the company had issued a sales warning and with its stock reeling, we said the pessimism had gone too far, arguing that the shares could rise 30%, to $194. The bullish call proved correct, with the stock hitting that mark in March.

From there, we warned that the stock’s 2019 gains could fade as investors returned their focus on the declining iPhone sales. Our view hasn’t changed. Apple is richly priced, just as conditions seem to be deteriorating.

Shares of Experian , the information-services company, have outperformed the leading United Kingdom stocks this year, rising about 33% to a recent 25.44 pounds sterling ($27.25). That compares with a 1.87% fall in the FTSE 100, the benchmark British stock index.

Much of the stock’s gain reflects increased demand for the data that Experian (ticker: EXPN.UK) crunches for corporate lenders seeking to mitigate risk, and consumers monitoring their credit scores. More gains seem likely as Experian wins new corporate customers beyond the financial-services sector, and extends its geographical reach to emerging markets, where credit-scoring needs are likely to grow, given a burgeoning middle class.

Although Experian shares fetch a hefty 31 times this year’s expected earnings, Paul Sullivan, an analyst at Barclays, isn’t daunted. “Experian is a compelling multiyear structural growth story that justifies a valuation premium,” he wrote in a July note.

Sullivan forecasts a 27% increase by 2022 in the company’s earnings before interest, taxes, depreciation, and amortization, from $1.6 billion to $2.1 billion. Lloyd Pitchford, Experian’s finance director, told Barron’s that the company is “increasing the pace of innovation and the speed at which we can bring new products to market.”

Experian was formed as a unit of Great Universal Stores, a British mail-order business founded in 1900. Great Universal grew into a retailing conglomerate that spawned luxury fashion brand Burberry and retail chain Argos. In the 1960s, millions of small customers were paying for goods on credit through the company’s mail-order business and home-furnishing stores. GUS pioneered credit scoring in order to decide whom to appoint as mail-order agents—representatives who delivered goods and collected payments. This morphed into one of the biggest credit databases in the U.K.

The credit-scoring division acquired U.S.-based Experian in 1996, adopting its name. Experian was spun out of Great Universal in 2006 and trades on the London Stock Exchange . The company has a market value of £22.9 billion, employs 17,200 people, and in May posted a pretax profit of $957 million for the year ended in March 2019, up from $950 million the year before on sales of $4.8 billion.

Experian boasts an Ebitda margin of 33.6%, versus an average 25.4% among its peer group. The stock returned 22.2% annually, including dividends, over the past five years, handily beating the FTSE All Share index’s 7.12% total return. Its shares yield about 1.5%.

Experian estimates that the market for verification of borrowers’ identity and creditworthiness is $110 billion and rising. “We continue to believe that the [company] is at the beginning of elevated organic growth based on recent investment and diversification, fueled by data proliferation, digitization, and process automation,” Barclays analyst Sullivan wrote in May.

The growth potential is evident in consensus earnings estimates for Experian. Analysts expect the company to net $1.06 cents a share in fiscal 2020, and $1.20 cents in fiscal 2021.

Data collection has come a long way since 1826, when British innkeepers, drapers, hatters, and chandlers received a monthly circular with information on people who had failed to pay their debts from the Society of Guardians for the Protection of Tradesmen against Swindlers, Sharpers and other Fraudulent Persons. Fortunately, for Experian shareholders, it also has a long way to go.