Gapping up
In reaction to strong earnings/guidance:
- NEPT +13.8%
M&A news:
- P +7.8% (Sirius XM (SIRI) might be interested in acquiring Pandora, according to NY Post, also expects to exceed Q4 guidance)
- SN +7.8% (Anadarko Petroleum to sell Eagleford Shale assets in South Texas for approx $2.3 bln to Sanchez Energy and Blackstone Group),
Other news:
- RXII +40.4% (OPKO Health (OPK) increases stake to 5.11% (Prior 3.43%), changes shareholding position to passive from active)
- TBIO +27.7% (continued momentum)
- TTNP +22% ( CMC has granted a opermanent J-code for Probuphine)
- IOTS +5.3% (after ~50% move higher on Thursday)
- OPXA +5.2% (following late move higher into the close)
- OREX +4.4% (after spiking higher into the close)
- NVLS +4.1% (approved a restructuring plan as part of the Company's initiative to explore strategic alternatives; cutting 25 of 30 emplyees, including the CEO and CMO)
- IMMU +3.8% (continued momentum)
- ZIOP +3.6% ( following Najarian mention on CNBC)
Analyst comments:
- MBLY +2.8% (initiated with a Buy at Jefferies)
- GRUB +2.4% (upgraded to Overweight from Equal-Weight at Morgan Stanley)
- CNHI +2% (upgraded to Neutral from Underperform at BofA/Merrill )
- NOK +1.5% (upgraded to Buy from Neutral at Natixis)
- NFLX +1.2% (upgraded to Hold at Deutsche Bank)
- CIEN +0.7% (initiated with a Buy at UBS)
- FB +0.7% (upgraded to Strong Buy from Outperform at Raymond James)
big bond inflows ($7.8bn = largest in 3 months), equity inflows ($8.1bn), 9th consecutive week of gold outflows ($0.7bn)
>>> Asset Class Flows
- Equities: $8.1bn inflows ($2.5bn mutual fund outflows vs $10.6bn ETF inflows)
- Bonds: largest inflows in 3 months ($7.8bn)
- Precious metals: 9 straight weeks of outflows ($0.7bn)
>>> Equity Flows
- Japan: largest inflows in 9 weeks ($3.1bn)
- EM: modest inflows of $0.5bn (but outflows in 8 of past 11 weeks)
- Europe: ekes out $0.6bn inflows
>>> Fixed Income Flows
- Largest inflows to IG bond funds in 3 months ($3.8bn)
- First inflows to muni bond funds in 11 weeks ($0.8bn)
- 5 straight weeks of outflows from Govt/Tsy funds ($0.6bn)
- 9 straight weeks of inflows to bank loan funds ($1.2bn)
- 7 straight weeks of inflows to HY bond funds ($1.2bn)
- 5 straight weeks of inflows to TIPS funds ($0.7bn)
- 2 straight weeks of inflows to EM debt funds ($1.3bn)
- 10 straight weeks of outflows from MBS funds ($0.5bn)
Thesis: Our analysis finds WhiteWave’s prospects are materially worse than we had previously thought. We estimate returns from the transaction will be poor and expect €5bn of value destruction, equivalent to 13% of Danone’s market cap. With Danone’s core business also under pressure, we argue the coming years will prove difficult for shareholders and downgrade from Buy to Sell.
Animal rights organisation PETA has taken a stake in French luxury house LVMH as it steps up its fight against the luxury industry’s use of exotic animal skins.
The move, which will follows similar action by PETA at Hermes and Prada, will give the organisation access to the shareholder meetings of LVMH, owner of brands including Louis Vuitton and Dior.
It illustrates the increasing pressure on luxury firms to show that they are ethical.
A statement from PETA said:
In the wake of an exposé revealing that reptiles on crocodile farms in Vietnam — including two that have supplied skins to a tannery owned by Louis Vuitton’s parent company, LVMH — are confined to tiny pits and sometimes hacked into while they’re still alive and thrashing, PETA has become a shareholder of LVMH on the Euronext Paris to put pressure on the company to stop selling exotic skins merchandise.
Short-term pain, but growth not priced, Buy Suez/Veolia (off CL)
Reiterate Buy on Suez; strong growth outlook to be reflected in higher valuation multiple
With inflation/economic growth data expected to turn to more positive, cost-cutting likely to be strengthened and extended over time, and a structurally positive outlook on waste/water activities in emerging markets, we expect valuation multiples to rerate to reflect the strong growth outlook we forecast for Suez (5% 2017-19E EBITDA CAGR and 13% EPS CAGR). Any indication that Engie may revise its stake m/t would also act as a positive catalyst (our price target includes an M&A component at a 15% weight).
* CL-Buys: Ascential, ITV, Publicis are our top picks
We add the following onto the Conviction List (CL): Ascential, for its high structural growth and M&A potential at an attractive valuation; ITV, for its content exposure, upside to consensus ad forecasts, M&A potential and low valuation; Publicis, for the turnaround potential, US exposure and prospective buyback at a low valuation. Other changes: Informa, Lagardere and Vivendi off CL; A3, JCDecaux, ProSieben, Relx NV to Buy, from Neutral; Mediaset, UBM down to Neutral; and M6 to Sell, from Neutral.
Media stocks underperformed the broader market in 2016 for the first time since 2009, as growth disappointed and structural concerns heightened. Cyclicals in our coverage have lagged the rotation, outperforming defensives by 7% since July 2016, vs. 34% in the broader market. The media sector now trades on a 16.4x 12M PE, a 7% premium vs. the market
(historical average premium of 13%) while media cyclicals present a 5% premium to defensives (historical average premium of 19%). We believe this does not price in the broad pick-up in growth, and creates compelling opportunities, given our expectations of 17%/9% EPS growth in 2017/18 vs. +12%/5% for the market, with attractive yields and FX tailwinds. As a result, we move our Coverage View to Attractive, from Neutral.
* M&A centre stage in TV, Agencies, Events, Outdoor
We believe the recent pick-up in M&A activity could continue in 2017, given the rising importance of content and scale in distribution, while a number of fragmented end-markets (agencies, events, outdoor) could benefit from further in-market consolidation. We see the most likely targets in our coverage as Ascential, Havas, ITV, UBM and Mediaset, assigning 30% M&A weightings in our price target calculations.
* Rekindling the relationship between macro activity and ad spend
Improving macro trends led by the US and EM (global real GDP growth of 3.6% in 2017E after 3% in 2016) should support ad spend. We expect agencies to be the main beneficiaries, but rising input costs could weigh on certain clients. Our regression analysis suggests the relation between macro activity and ad spend still holds, with the exception of the UK in
2016, which could point to significant upside to consensus forecasts.
*
Navigating the headwinds and tailwinds of 2017; Top picks: ITV, JE/, PUB, RELX, SPR, WPP
1) any potential investor rotation from ‘bond proxy’ stocks to value,
2) news flow around and the outcome of political elections (e.g. in France, Germany, Netherlands),
3) any impact from previous major events (Brexit, Trump), and
4) as always, overall health of the economy in different countries. That said, our analysis in this reports suggests that while top-down themes will be influential, stock-specific factors will continue to be more important. Our top picks are Springer, ITV, JUST EAT, Publicis, RELX, WPP (all OW). Our least preferred stocks are Wolters and Lagardère (UW).
* Top-down vs bottom-up drivers:
1) Top down: Looking at the correlation of stock price performance with the direction of bond yields, we found little
consistent direction of correlation over time; stocks within sub-sectors with similar profiles (e.g. cyclical free TV or defensive professional publishers) often performed differently. While we expect the direction of yields to influence stock performance, we conclude that fundamentals remain more important. Second, we looked at the correlation between GDP/consumer sentiment and ad growth for FTA TV and Ad Agencies. We found that a)consensus NAR expectations imply upside for ITV (JPMe -3% vs. cons -5% in 17E) but appear full for ProSieben (at +2% NAR). In the context of +3.4% global GDP growth in 17E, expectations for WPP/PUB also appear conservative.
2) Bottom-up themes we expect to drive the sector in 2017 include M&A (e.g. next moves by VIV), self-help (e.g. any disposals by SPR), restructuring plans (e.g. PSON, INF), EPS upgrade potential (e.g. RELX on the back of Risk’s accelerating performance), and as always, attractive valuation (WPP; Publicis, ITV).
* Our top picks:
1) While Brexit is an obvious risk, ITV shares are cheap (12.5x 17E P/E) on low expectations, Studios rev growth should be better in 17E (e.g. two series of Hell’s Kitchen), and our economist recently upgraded 17E UK GDP forecast by 0.3ppt. 2) RELX is accelerating its organic revenue growth (from +3% to +4%) with the move to more sophisticated products, has balance sheet capacity for bolt-ons/buybacks, and trades on lower multiples than other defensives.
3) We believe PUB and WPP are competitively well positioned vs consulting companies, that their organic rev growth is more resilient than perceived, and the stocks offer high Eq FCF yields (8.5% and 7.6% 17E, respectively).
4) We expect takeaway food and JUST EAT to prove more resilient than expected, and see the company
continuing to deliver top-line growth well above any other stock in the sector.
5) For Axel Springer, we see attractive valuation (10.8x 17E EV/EBITDA) and a turnaround in EBITDA growth (+10% pa 16-18E).
* We downgrade several stocks on valuation grounds: From OW to N for AUTO, M6, UBI and VIV; from N to UW for MMB.
EU Integrated Oil 2017 Outlook: Stay bullish
OW BP (AFL), Shell, Statoil; UW ENI, Repsol, OMV
EU Oil’s risk/reward remains positively skewed and we expect
outperformance in 2017 will be led by a secular inflection in cashflows. We
raise our TPs by 7% implying 10% upside for our Buys plus a 5.7% dividend
yield. We highlight three themes in 2017: (1) de-leveraging (we model an
average 120bp ND/CE reduction 2017/16E, taking the sector average to 26%),
(2) improved capital efficiency – we forecast an 8% reduction in sector capex
2017/16E, (3) execution on production growth (JPMe: av. 4.1% growth
2017/16E). Against that backdrop our preferences are as follows:
* Overweight: BP (TP £5.60), Shell (TP £26.00), Statoil (NOK 175) should
outperform by offering the greatest rate of change in cost reduction/gearing,
upstream portfolios with attractive risk/rewards at $60/bbl long term and
adequate affordability to invest in future growth within the confines of
structurally lower gearing.
* Underweight: ENI (TP €13.5), Repsol (TP €13.5), OMV (€30.5) - we
view their asset bases as driving inferior risk/reward profiles, which
together with limited differentiation in cost reduction translates into a more
challenged path to de-gear and mid-ranked CF/share growth.
Look for positive de-coupling from oil in 2017: right for the right reasons
EU Oil’s 10% outperformance vs. the market in Q4 is broadly correlated with
oil moving higher following the OPEC cut late November. Our Post-Launch
Feedback suggests that Long Only Institutions appear generally underweight,
particularly in the US. We believe there is further scope for rotation into Big
Oil from generalist money if company managements can demonstrate capex
discipline, more efficient capital allocation and improved project returns.
History has shown that self-help can drive a positive de-coupling in oil equities
from range bound oil prices (e.g. 2000-03). To us, the burden of proof lies in
the positive trending of CFFO, FCF dividend coverage and gearing.
4Q ideas: Buy BP, STL on macro tailwinds, CFFO, production/execution
4Q earnings season begins with Shell on 2nd February. Improved macro
conditions (oil up 9% q/q, EU gas/refining and Fx) drive JPMe sector earnings
c.40% higher q/q (US terms) and cashflows c.30%. Amongst the majors we
see Statoil and BP as best placed. Macro tailwinds and seasonally strong
production in Norway make us positive on Statoil, while BP should offer
positive upstream momentum through its exposure to stronger Henry Hub
prices (as well as oil) and a reversal of 3Q US GoM downtime. Shell
performed well in 4Q and we remain fundamentally positive for 2017, but
highlight the risk of a pause in momentum with FY’s through both Upstream
and Oil Products. In the midcaps we anticipate a robust quarter for Galp,
taking it comfortably above FY16 EBITDA guidance, set against the risk of
weakening momentum at OMV. Evidence of continued capital discipline
through strategy updates will be a key input.