Devon Funds Morning Note - 17 February 2025

Monday 17th February 2025

In the bag

Global

The US indices we relatively subdued on Friday, with the S&P500 closing flat, while the Dow fell 0.4% and the Nasdaq lifted 0.4%. For the week the indices were in the green, with the broader benchmark rising 1.5% while the Dow rose 0.6% and the Nasdaq jumped 2.6%. Investors appeared encouraged that Donald Trump’s tariffs plans were largely kicked down the road to 1 April, while hotter than expected inflation data was taken in stride. It was a good week for Apple, with shares in the world’s most valuable company soaring 6%, helped by a deal with Alibaba to integrate AI into its phones in China. CEO Tim Cook also said Apple will launch a new product this week – it is expected to be a 4th generation iPhone SE with AI features which will spur demand as part of the next user upgrade cycle.

This week the minutes from the last Fed meeting are due to be released. This pre-dated last week’s hotter than expected inflation (CPI and PPI) prints which has increased the prospect of the next rate cut not happening until the second half of the year. PMI data will also provide a sighter around the economy where data prints have been mixed of late.

Per the Fed, industrial production in the US rose more than expected in January, supported by a continued rebound in aircraft manufacturing following the resolution of a Boeing strike. Overall industrial output increased 0.5% last month, surpassing the 0.3% gain forecast. US retail sales though fell a more than expected 0.9% in January. Excluding autos, prices fell 0.4%, also well below consensus expectations for a 0.3% increase. Receipts at sporting goods, music and book stores tumbled 4.6% while online spending dropped 1.9%. We will get a further sighter on the state of the consumer this week, with results from Walmart, the world’s biggest retailer.

Results across the US earnings season to date have generally been very good, and this continued to be the case on Friday. Investors were checking into Airbnb following its results, with the shares having their best day since being listed in 2020, surging by 14%. Consumers are cutting back or downsizing on many items, but spending on experiences still appears to be strong. The online rental platform reported a 12% increase in revenues to US$2.48 billion for the quarter, ahead of estimates and taking full year revenues to US$12 billion, which is a record. The company also swung to a profit for the quarter, reporting net income of US$461 million, compared to a loss of US$349 million reported a year ago.

Gross bookings rose to US$17.6 billion and Airbnb also reported 111 million nights and experiences booked for the period, which is 12% higher than a year ago. Airbnb has been listening to customers and has made over 500 tweaks and upgrades. Advancements include verifying listings, highlighting the top 10% guest favourites, and removing 100,000 low-quality listings from the platform. Management are looking to invest around US$200 million to US$250 million into “scale” new business opportunities. The company wants the Airbnb app to be the “Amazon of vacations.“ It has the financial firepower to do so, as Airbnb generated US$4.5 billion in free cash flow in 2024. The company has guided for revenue for the current quarter of ~US$2.25 billion.

Airbnb is also not all about the money, but is also doing its bit socially. During last month’s wildfires in LA, its non-profit arm housed more than 19,000 people and 2,300 pets, with US$18 million donated from its founders. Doing well and doing good.

Another company popping 14% was Roku. The streaming company reported quarterly revenues of US$1.2 billion which was up 22%, and a lower than expected loss of US$35m. Households using its platform grew by 12% year over year in 2024 to 89.8m and it is on track to reach 100 million in the next year. More than half of U.S. broadband households now watch TV with Roku. Moderna shares though were weaker by 3.4%. The vaccine maker reporter quarterly revenues of US$966m but a steeper than expected loss. Sales guidance for FY25 remains in a wide range of US$1.5 billion to US$2.5 billion.

In Europe, the indices had a strong week with the STOXX600 rising 1.8% although it was lower on Friday. The Eurozone economy grew 0.1% in the fourth quarter, and at an annual rate of 0.9%, even as the EU's two largest economies contracted, with German GDP contracting by 0.2% and French GDP decreasing by 0.1%, while Italy stagnated for a second straight quarter. Eurozone employment marked a 15th consecutive period of expansion so the EU's labour market remains tight.

An end to the war in the Ukraine would be positive for Europe, but the pathway here remains uncertain. The US Special Presidential Envoy for Ukraine said on the weekend that a peace plan for the two warring nations could come within “days or weeks.” Ukrainian President Volodymyr Zelenskyy has meanwhile called for a European army to be created and has warned that Russia is “not preparing for dialogue” on peace talks. He said a meeting between Presidents Trump and Putin, with the involvement of Ukraine, would be “very dangerous.” The U.S. had meanwhile proposed taking ownership of 50% of Ukraine’s critical minerals worth at least US$500b as part of the dealmaking process – not a bad brokerage fee.

Stock wise in Europe, Hermès reported a cracker of a result with an 18% surge in quarterly sales to €3.69 billion. This was well above the rise expected. The fastest growth was in the Americas and Japan, where sales both leapt 22%. The Hermes leather goods and saddlery division, which accounts for nearly half of group revenue, saw sales up 22% as well.

Hermès is a luxury goods maker, including Birkin bags which go for US$20,000+. You can pay over US$100,000 for one with crocodile skin.

In 2022, Sotheby's sold a Diamond Himalaya Birkin 30 for over US$450,000.

The sales growth also means that Hermès continues to outshine rivals like LVMH which reported just 1% sales growth over the final quarter. The overall luxury goods industry has seen its slowest sales in years. Global luxury sales fell around 2% last year due to sluggish demand in China and global inflationary pressures putting the squeeze on.

Perhaps Hermès’ strength has been exclusivity. The company looks to maintain its aura by keeping supply tight – the annual increase in production is limited to 6-7% a year. Management meanwhile also said they wouldn’t adjust this even if there were US tariffs on European goods, suggesting they would just pass any tariffs onto consumers. Based on these results they shouldn’t have any trouble there. The company is already planning to put up prices 6-7% this year. The shares edged higher, taking the company’s market cap to over €300 billion, and closing in on LVMH, which employs 200,000 people – 10x the headcount. Hermès may soon have the title of Europe's most valuable listed company in the bag.

In the UK, the FTS100 eased 0.4% on Friday, but was up 0.4% for the week. Shares in NatWest fell 2.8% on Friday as the bank delivered annual pre-tax profit rose of £6.2bn, ahead of forecasts, with loan growth and stronger deposit inflows supporting income. Net interest margins edged up to 2.13%, but forward guidance was reduced.

In Asia, the Nikkei was 0.8% lower, but the Hang Seng had a stellar session, soaring 3.7% propelled by tech stocks. Alibaba soared another 6% following the announcement of its collaboration with Apple to bring AI features to iPhones in China.

New Zealand

Investors were feeling the love in NZ on Friday, with the NZX50 up 0.64% at 12,989. Fisher & Paykel Healthcare jumped 1.9%. Contact Energy was 1.1% higher.

Contact is out with results this morning. The gentailer has reported a 12% increase in operating earnings (EBITDAF) to $404m at the half year, driven partly by increased geothermal generation with Tauhara online. This was partially offset by higher gas and acquired generation costs, amid extreme hydro volatility, and one-off costs of $10m associated with the proposed acquisition of Manawa Energy. On the back of expanded renewable generation, Contact has lifted earnings guidance for FY25 to $790m from $770m previously.

Freightways has reported a 6.7% increase in revenue for the half to $662.1m and a 6.5% lift in earnings (EBITA) to $86m. The dividend has been lifted. Lower same customer volumes in its express business have been offset by pricing improvements and market share gains, while costs were well contained. A slightly lower level of debt allowed the company to reduce their interest spend. The company recorded positive revenue and earnings growth. Australia was more positive than NZ. The company said while interest rates are beginning to fall in NZ and business confidence is slowly returning, it remains cautious about any rapid recovery in NZ and to a lesser extent Australia where it is seeking M&A opportunities.

A2 has reported half year revenues grew 10.1% to $893.8 million, driven by continued growth in the China & Other Asia segment, up 11.8%. The USA segment saw 13.2% growth and Mataura Valley Milk was up 31.9%.

Australasia decreased 2.7% due to a further decline in the Daigou channel. Total IMF sales grew 7.2% led by English label which was up 13.0%, whilst China label sales were 2.0% higher. Earnings (EBITDA) rose 5.0% to $118.9 million. A2 also lifted its outlook, with FY25 revenue growth guidance increased from mid to high single-digit, to low to mid double-digit percent on prior year.

Also out with an update on guidance is Infratil. As a result of Manawa Energy lowering its full year earnings guidance, Infratil (which owns 51% of Manawa) has reduced its earnings (EBITDAF) guidance to $951 – $991 million, from $960 – $1,000 million.

Auckland Airport has come through with a traffic update. International passenger movements, excluding transits, for the month of January increased by 5% compared to same month last year and represents a recovery to 94% of the pre-COVID equivalent, the highest since the pandemic. Load factors on the China routes improved the most, increasing by 15 percentage points to 85%. Domestic passenger movements increased 2% in the month.

Inflation has been coming down, but not such good news for food prices which rose 1.9% in January, the biggest monthly increase since July 2022. About 65% of items priced in the food basket were more expensive in January 2025. The proportion of the food basket that increased by over 5% in price was the highest in five years at 20%.

Grocery food prices continue to rise. Dairy is a lot more expensive than it was. Milk is up 16% and the price of 500g of butter is 52% higher than a year ago at $6.79. Not such a happy Valentines Day for chocolate lovers. The average price of a 250g block of chocolate was $5.72 in January 2025 compared with $4.90 in January 2024. Cocoa prices globally though have been on a tear for much of the past year with adverse growing conditions and disease outbreaks in West Africa. Fruit & veges prices are higher, up 2.8%. Broccoli prices soared 58% to $10.25 a kg. Alcoholic beverages and tobacco prices increased 2.4%.

Outside of food, there was also data on other selected price indexes. Petrol prices rose a further 4% in January, and diesel jumped 5.8%. Good news for flyers though. Domestic and international air travel fell 1.3% and 11.7% respectively. Airfares are losing altitude.

So not such good news for the shopping basket. A weaker currency may be putting some wind under import costs, but fortunately for those holding out for another big cut to interest rates by the RBNZ this week, inflation overall is playing ball and down at the lower end of the central bank’s target price range.

This is also while we have finally had some good news on the manufacturing sector – it has expanded for the first time in 23 months…yippee!

In the week ahead we have plenty of results out (another 14) and some trade data. The big one however is the OCR decision on Wednesday. Here’s hoping for a cut of at least 0.50% and ideally 0.75%.

Australia

The Aussie market hit a fresh record high on Friday with the ASX200 closing up 0.2% at 8,555. CBA and NAB were lower but ANZ and Westpac rose. The gold sector jumped, and Rio lifted 0.7%. Prices for iron ore hit US$108 a tonne as a severe cyclone approached Port Hedland. Australia’s biggest iron ore port has reopened, and been spared any major damage from Tropical Cyclone Zelia. BHP and Rio both report this week.

Cochlear shares fell 14% as the company downgraded its full-year profit forecast. AMP fell 15% as it halved its dividend. Profits nearly halved to A$150 million in FY24 following the sale of the firm’s advice arm and business simplification.

Mirvac jumped 5.5% as the property developer expressed optimism about a recovering housing market. Half year profit fell 6% to A$236 million but the company reported a 51% increase in new home sales.

Australia’s biggest steelmaker, BlueScope, has lifted its interim dividend even as net profit after tax dropped 59% to $179.1 million. BlueScope generates about half of its profits from the US. The company expects earnings to improve in the second half, with Australia picking up amid cost cutting.

This morning construction company Lendlease has reported a first half profit of A$48 million, reversing losses in the same period last year amid cost savings initiatives. Westpac has reported quarterly numbers. Net profit excluding exceptions rose 3% to A$1.9b. Core net interest margin slipped by two basis points to 1.81%, amid mortgage competition and further deposit mix shift towards lower spread savings and term deposits. Australian housing loan growth was 2% and it was 3% for business loans and 6% for institutional loans.

We have the Reserve Bank decision tomorrow. Markets are pricing in the first rate cut in four years.

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