Investments & Wealth
Summer reporting season update 2022
International Equity Portfolio
Note: All figures in USD unless otherwise stated. Results referring to percentage changes (increases/decreases) relate to the previous corresponding period (pcp) e.g. Q4 FY22 results are compared to those of Q4 FY21.
Apple Inc (AAPL: US)1
| Share price | 29/11/22: US$141.17 |
| Result | Q4 FY22 |
| Revenue | US$90.146 billion, up 8.1% on the pcp |
| Underlying EPS | US$1.29, up 4.4% on the pcp |
| Key points | A strong revenue result was led by growth in its Mac laptop computers where sales of $11.5 billion far exceeded consensus forecasts for $9.36 billion thanks to the launch of new Macbook Air and Macbook Pro designs. |
| iPhone sales of $42.6 billion by contrast showed some signs of weakness (consensus: $43.2 billion) but still recorded a record sales result in the September quarter. | |
| Revenue of $90.1 billion and earnings per share of $1.29 exceeded consensus forecasts of $88.9 billion and $1.27 per share respectively. | |
| As with other US-based firms mentioned below, currency was a major headwind to the value of overseas sales with the trade-weighted DXY index (a measure of the value of the US dollar against a basket of currencies) rising 7.1% over the quarter, a substantial drop in the value of any overseas profits. Part of this headwind may reverse in this quarter with the DXY index declining 4.5% on the back of speculation that the US would halt further interest hikes. | |
| The slowing global economy did see certain segments struggle with services revenue falling almost $1 billion short of consensus at $19.2 billion (consensus: $20.1 billion) due to weakness in digital advertising (businesses selling fewer ads) and gaming. Apple continues to expand its user base with a reported 900 million paying subscribers, up from 860 million in the June quarter. | |
| Our comments | The quality of Apple’s hardware and services franchise remains undiminished in our view. Upcoming iPhone 14 launch could serve as a meaningful catalyst for stronger revenue growth in line with the company’s outlook. |
| Strong dollar will impact earnings but may be nearing its peak with growth in the December 2022 quarter-to-date seeing a sharp reversal. | |
| Apple has remained a safe haven for investors this past year notwithstanding the macro backdrop. This has supported the share price but leaves the valuation more challenged notwithstanding the quality of the business. The development of ancillary business lines such as services and advertising are playing an important role in continued top line growth, justifying its more premium valuation relative to history. |
Abbott Laboratories (ABT: US)1
| Share price | 29/11/22: US$105.00 |
| Result | Q3 FY22 |
| Revenue | $10.41 billion, down 4.7% on the pcp. |
| Underlying EPS | $1.15, a decrease of 17.9% on the pcp. |
| Key points | Abbott upgraded guidance for 2022 to $5.17-$5.23 adjusted earnings per share which included $0.5 billion in COVID-19 testing sales and excluded certain one-off costs such as the voluntary recall of its baby formula products. |
| This amounted to a further 8.3% upgrade on its June quarter update guidance of $4.70 to $4.90 per share. | |
| Key drivers were strong demand for its medical devices and diagnostics products with the launch of its latest generation glucose monitoring device (to manage diabetes) being well-received. | |
| The resumption of infant formula production was also positive and should eventually help restore sales in this space which were depressed following the factory shutdown earlier this year on product quality concerns. The presence of new entrants in the wake of the shutdown production such as A2 Milk may weaken the medium-term outlook by introducing additional competition in this segment. | |
| Our comments | COVID-19 testing sales are rapidly declining as a source of revenue and earnings with an increasing expectation that these are immaterial from next year. Earnings will fall in 2023 as a result (this reflects current market consensus) before gradually exceeding 2022 results in 2025 as a result of growth in other segments eventually catching up to the temporary earnings boost from COVID-19. |
| The company declared its 395th consecutive quarterly dividend and has increased its dividend for 50 consecutive years, highlighting its growth over time and the quality of its operations to continue paying dividends through several recessions over that period. | |
| Despite challenges in the form of losing COVID-19 diagnostic sales, the business remains well-positioned for strong growth over time and investors will benefit from both this and a regular, increasing dividend presenting an attractive total return versus the broader market in our view. |
Adobe (ADBE: US)1
| Share price | 29/11/22: US$326.78 |
| Result | Q3 FY22 |
| Revenue | $4.433 billion, up 12.7% on the pcp |
| Underlying EPS | $3.4, an increase of 9.3% on the pcp |
| Key points | Adobe saw 13% revenue growth in its digital media segment, 11% in its Creative revenue and 23% in its Document Cloud offering. |
| The business continued to build annualised recurring revenue (ARR), a measure of repeat business, with $449 million added for the quarter in net terms to its Digital Media division after allowing for customer churn. | |
| The firm is targeting another $550 million in net ARR for the December quarter | |
| It left its 2022 full year guidance unchanged at $13.50 adjusted earning per share even allowing for headwinds from a stronger US dollar which is being offset by a seasonal uptick in demand for Adobe products. | |
| The company also gave more colour on its acquisition of Figma for $20 billion (half cash, half in shares) which it identified as having a $16.5 billion market opportunity, a strong margin profile (gross margins at 90%) as well as growth prospects that would allow Adobe to accelerate its product strategy particularly in delivering Creative Cloud solutions online. | |
| Our comments | While the derating in the first half of 2022 was painful the core Adobe business continues to execute well in our eyes. |
| Its breadth of tools makes it well-suited to the rise of new or more popular forms of media for creatives and the building ARR book suggest it retains stickiness amongst users. | |
| In summary, the core business is continuing to execute well in balancing profitability while spending for growth and should be able to compound earnings growth above the broader market in the medium term. | |
| However, the price paid for Figma was extremely high relative to what it is adding to Adobe in the immediate term. Figma has recently been reported as generating $400 million in ARR implying a multiple of 50x ARR and a doubling of the $10 billion valuation Figma was given in its last capital raising as a private business in 2021. | |
| Figma undoubtedly has strategic value as a cloud-native solution (i.e. it was designed for an online world from the beginning versus existing software businesses). This gave it an advantage for functionality with other open-source providers and made it a potential longer-term threat to Adobe by building a “good-enough” solution that would enable users to circumvent the Adobe ecosystem. | |
| This transaction negates that potential threat and has value in that regard. Purely as a business acquisition we will not know if or by how much Adobe overpaid until several years into the future when we can properly assess the success of integrating Figma and growing it and its associated offerings under the Adobe umbrella. |
Alphabet Inc. (GOOGL: US)1
| Share price | 29/11/22: US$95.19 |
| Result | Q3 FY22 |
| Revenue | $57.27 billion, up 6.8% on the pcp |
| Underlying EPS | $1.06, a decrease of 25.5% on the pcp. |
| Key points | Google continued to show signs of greater sensitivity to the global economy with weaker demand and poor cost management translating into missing consensus expectations for both revenue and earnings in the September quarter. |
| YouTube ad sales for example declined to $7.07 billion, down 2% from a year ago. | |
| The weaker global economy and higher inflation has seen business ad spending decline particularly for areas such as insurance, loans and mortgages with higher rates slowing new mortgage loan originations for example. | |
| Currency remained a notable drag with growth to September slowing to 6% compared to 11% growth in constant currency terms. The weaker US dollar performance in the December quarter so far will be a meaningful tailwind assuming it persists. | |
| Google Cloud performance was a slight positive with revenue of $6.9 billion versus consensus of $6.69 billion. Operating losses also narrowed to -10.2% of sales compared to -12.9%, a year ago. | |
| Our comments | The Alphabet group has shown signs of sensitivity to global economic conditions which is unsurprising given the elevated growth since the pandemic began due to lockdown initiatives driving increased online activity. |
| Google Cloud remains a source of longer-term revenue growth (accelerating slightly to be up 37.6% for the September quarter year-on-year) and operating losses are continuing to shrink. | |
| The quality of the franchise particularly its core Search business remains intact with no meaningful competitor solutions of its scale and quality. | |
| Cost management remains a point of concern however with management still guiding to new employee additions in the December quarter despite the slowing growth profile. There are material levers to pull in this regard however with the company showing a willingness to cut staff during the global financial crisis and the substantial losses in its Other Bets division a natural target to improve profitability as well. |
Johnson & Johnson (JNJ: US)1
| Share price | 29/11/22: US$176.09 |
| Result | Q3 FY22 |
| Revenue | $23.79 billion, up 1.9% on the pcp |
| Underlying EPS | $2.55, down 1.9% on the pcp |
| Key points | Strong demand for cancer drug Darzalex continued to drive sales for its Pharmaceutical division with above-market performance driven by increased market share to Darzalex as well as strong demand for its immunology offerings such as Stelara. |
| A stronger US dollar dragged on international business performance, similar to other American multinationals. | |
| Plans to spin off its Consumer Health division as a new company are continuing to progress with final separation expected in 2023. One rationale behind the spinoff would be improved flexibility for the core JNJ business with Consumer Health being less material than its Medical Devices and Pharmaceutical divisions. | |
| JNJ strengthened its overall guidance slightly by tightening its average expectation for underlying EPS from $10.70 per share to $10.725 per share citing stronger underlying business as offsetting negative currency pressures. | |
| On 1 November 2022, JNJ also announced the acquisition of Abiomed, a leading provider of cardiovascular medical devices, for $16.6 billion. The deal is expected to be slightly negative to flat for 2023 earnings before increasingly adding to profitability from 2024 onwards. | |
| Our comments | The Abiomed acquisition is costly with the price equating to an almost 79 times current year earnings (65 times current year operating cashflow). It represents a strategic choice to emphasise medical devices within the JNJ business which should be able to accelerate the distribution of Abiomed products and realise value from its extensive product development to date. To recreate an Abiomed from scratch would be a costly exercise. The acquisition while costly can be rationalised as necessary to buy a capability in cardiovascular disease that JNJ lacked. In addition, it represents a less significant percentage of JNJ’s total market value compared to Figma relative to Adobe, hence the more muted share price reaction to the news. |
| The business has shown the benefits of its diversified operations in being able to navigate a difficult macroeconomic backdrop and eke out earnings growth. | |
| Our opinion on JNJ as a mature but growing business at a reasonable valuation remains intact. The ability to reprice its pharmaceutical products also highlights the quality of the brands within its stable. Extending its medical device franchise should improve recurring revenue over time as products such as the Abiomed suite are needed to monitor heart health for example. |
Microsoft Corporation (MSFT: US)1
| Share price | 29/11/22: US$240.33 |
| Result | Q1 FY23 |
| Revenue | $50.12 billion, up 10.6% on the pcp |
| Underlying EPS | $2.35, an increase of 3.5% |
| Key points | We saw signs of US dollar strength challenges with Azure growth slipping to 35% for the year to September (consensus: 36.5%) and Microsoft projecting a further slowdown for the December quarter. |
| Microsoft guided to cloud revenues of $21.25 billion to $21.55 billion, slightly below consensus estimates of $22.01 billion. | |
| Elsewhere in the business, personal computing was impacted by a slowdown in consumer spending with projected sales of $14.5 billion to $14.9 billion versus estimates of $16.96 billion for the December quarter highlighting continued weakness is anticipated. | |
| Our comments | Microsoft is still performing strongly in underlying terms particularly with its cloud business. It has, however, begun to show signs of sensitivity to the broader economy with segments such as personal computing struggling in recent quarters. |
| US dollar strength has also posed a headwind to the business although this is likely abating in the near term given the selloff in the US dollar in the current quarter-to-date. | |
| The bid for US gaming giant Activision continues apace and if it proceeds should open up more revenue opportunities for the Gaming division given the depth of intellectual property being acquired. | |
| Our overall thesis on the business remains intact with the shift to cloud offering a path to continued earnings growth and returns on capital at a premium to the broader market and a reasonable valuation in our view. |
Nestle S.A. (NESN: CH)1
| Share price | 29/11/22: CHF 111.26 |
| Result | Q3 FY22 |
| Revenue | CHF 23.55b, up 9.4% on the pcp |
| Key points | Nestle saw organic sales growth of 8.5% for the nine months to September split between 1% of real internal growth (RIG, a volume measure) and 7.5% of pricing growth. |
| Organic growth or the nine-months to September was broad-based at 7.4% for developed markets (58% of group sales) and 10.2% for emerging markets (42% of group sales). | |
| On an underlying volume basis, the result was more subdued at 0.1% for developed markets contrasting to a more robust 2.5% growth in emerging markets. | |
| The company upgraded its FY22 guidance with an expected organic sales growth rate of “around 8%” up from the previous target of 7-8% and confirmed an underlying operating profit margin of ~17%. | |
| The business announced the acquisition of the Seattle’s Best Coffee business from Starbucks, bolstering its coffee franchise. | |
| Our comments | Nestle continues to exert strong pricing power, leveraging the power of its brands to maintain positive volume growth. |
| The business has performed well, given its global scope, in containing inflationary pressures in its cost base and also passing on increases to end consumers. | |
| The resilience of organic growth is being tested with developed markets weak on a volume basis. The concern is whether consumers is the wake of higher inflation and interest rates globally will continue to tolerate higher prices or pivot into substitute goods. | |
| Emerging markets remain a growth segment with notable volume growth (2.5%) even in the face of sizeable pricing increases (7.8%) highlighting the inelastic demand for Nestle goods. | |
| Overall, the business remains well-placed to continue generating high single digit earnings growth without being overly troubled by inflationary challenges and returning capital back to shareholders in the form of dividends and buybacks. |
Universal Music Group (UMG: EU)1
| Share price | 29/11/22: EU 22.25 |
| Result | Q3 FY22 |
| Revenue | EU 2.664b, up 23.7% on pcp |
| Underlying EBITDA | EU 553m, an increase of 20% |
| Key points | UMG saw top line revenue rise 13.3% year-on-year in constant currency terms driven by growth in all segments. |
| At a segment level, Recorded Music saw 10.1% revenue growth, Music Publishing 6.9% and Merchandising & Other was up 101.1% (in constant currency terms). | |
| Recorded music was bolstered by strong demand for subscription and streaming offering with 7.7% growth for the year, supported by continued growth in music subscribers both in premium and ad-supported offerings. | |
| The removal of coronavirus restrictions bolstered demand for live touring with the License and Other revenue segment growing 30.2% for the year. | |
| Music Publishing was impacted by a change in accounting practices. Excluding this growth was 12.3% instead of 6.9% quoted above. Digital continued to perform well, up 17%, thanks to the growth of streaming and subscription offerings. | |
| Finally Merchandising and Other benefitted from the rebound in touring-related merchandising (for live events and the like) following a COVID-19 related slowdown in touring during 2021. | |
| Our comments | Our thesis of Universal Music as a diversified record label able to extract value from different facets of the music industry ranging from live events to streaming (e.g. Spotify) offerings as it benefits from its extensive catalogue of music rights. |
| Currency impacts helped cushion results on a reported basis due to the relative weakness of the Euro this year. In a stronger period of European economic growth, the reverse may hold should the Euro appreciate. | |
| Universal Music will continue to be capital intensive to an extent as it needs to find and develop new artists to bolster its music catalogue. We would also expect some royalty acquisitions over time where the company sees the value in being opportunistic in adding new music royalties as part of its stable. |
Union Pacific Corporation (UNP: US)1
| Share price | 29/11/22: US$212.77 |
| Result | Q3 FY22 |
| Revenue | $6.57 billion, up 18% on the pcp |
| Underlying EPS | $3.19, an increase of 24.1% on the pcp |
| Key points | Operating revenue growth was driven by a combination of volume growth, core pricing increases and higher fuel surcharge revenue (surcharge passed on to customers). |
| Importantly business volume growth remained positive, up 3% over the same period. | |
| This result belied substantial challenges in the form of strong inflation via high fuel and wage costs. | |
| The company downgraded guidance with volumes now targeting 3% growth (down from 4-5%) and a full year operating ratio of 60% (up from 58%) implying weaker profit margins to close out 2022. | |
| Our comments | Our overall view on the business remains intact |
| Arguably more than some other businesses it has seen meaningful challenges from supply chain disruptions, higher labour costs and energy prices. | |
| It has however demonstrated the quality of its moat with pricing power a key lever in countering these impacts and passing them on to the end customer instead of absorbing through lower profit margins. This has been tested more recently but we expect over time that productivity initiatives and the easing of supply chain challenges will support business results going forward. | |
| We continue to see Union Pacific as an inflation-protected annuity stream that supports our portfolio with its defensive nature. |
Visa Inc. (V: US)1
| Share price | 29/11/22: US$209.06 |
| Result | Q4 FY22 |
| Revenue | $7.79 billion, up 18.7% on the pcp |
| Underlying EPS | $1.93, an increase of 19.4% on the pcp |
| Key points | Visa saw a strong result ahead of consensus estimates in the September quarter with EPS of $1.93 (consensus: $1.86). |
| Key drivers included the resilience of consumer spending to date and increased travel demand in the Northern hemisphere, notably the US as consumers took advantage of the stronger US dollar to travel overseas. | |
| The payments processor saw payment volumes rise strongly by 10%, boosted by a 36% surge in cross border volumes (card spending outside the country of issue). This suggest that spending is not just inflation-related but also supported by underlying demand, a near-term positive for Visa which profits from this upswing in activity. | |
| The board approved an increase to its quarterly cash dividend by 20% to $0.45 per share and also authorised a new $12 billion share buyback program which should bolster share price growth in the near term. | |
| Our comments | Visa continues to play a role in global commerce as a key payments processor with its duopoly with Mastercard remaining intact. |
| Travel volumes are a notable boost to overall sales and as travel demand continues to recover it remains a useful upside catalyst in the near-term notwithstanding the challenges that higher energy prices and interest rates pose to consumer spending. | |
| The business has maintained margins and seen earnings recover in line with the boost to consumer spending, justifying our position as a high-quality exposure to global commerce. |
1 Company Transcripts, Reuters and Bloomberg
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