Devon Funds Morning Note - 26 February 2025

Wednesday 26th February 2025

Trusting the process

Global

Technology stocks sold off again on Tuesday, with the Nasdaq falling 1.4% while the S&P500 was 0.5% lower. Nvidia fell 2.8% ahead of its results. Banks were weaker as US consumer confidence posted its biggest drop since 2021 amid a slowing economy. The Dow though rose 0.4%, driven by retail giants Walmart and Home Depot as the latter delivered an earnings beat as same-store sales rose for the first time in two years. Confidence may be waning, but US consumers are still spending. With Donald Trump set to push the button on tariffs against Mexico and Canada this weekend, there is some inflationary respite on other fronts. Oil prices fell for another day and are below US$70 a barrel. As Ukraine marked the third anniversary of the war on Monday, Vladimir Putin said Europe will be needed for peace talks once Russia has gone through a “trust building” exercise with Washington.

Many members of the MAG7 meanwhile have gone into reverse of late. Tesla has fallen over 8% (and below US$1 trillion in market cap) on an industry report showing sales of Tesla’s vehicles in Europe fell 45% last month, while overall industry EV sales roared 37% higher. It will be interesting to see whether this turns the focus of Elon Musk at all from events in Washington.

Donald Trump wants to “make America great again,” but investors may need to gain some further trust in the process. After the initial fanfare around his arrival in the Oval Office, sentiment has started to wilt, particularly towards growth names on the prospect of higher inflation, and interest rates staying where they are for longer.

Consumers are also less upbeat. The Conference Board’s Consumer Confidence Index fell to 98.3 in February, well below estimates for 102, and the largest monthly decline since August 2021. It was the third consecutive month on month decline. Of the five components of the Index, only consumers’ assessment of present business conditions improved, albeit slightly. Views of current labour market conditions weakened (16% of respondents said positions are “hard to get”).

Pessimism about future employment prospects worsened and reached a ten-month high. Consumers became pessimistic about future business conditions (and more consistent with a recession) and less optimistic about future income. Concerns appear to be justified by a weakening in activity. A separate print showed service sector activity in the Philadelphia area tumbled in February, to a read of -12.9 from 2.2 in January, for the lowest reading since April 2023. The gauge measures the difference between companies reporting expansion and contraction. The sales/revenue index tumbled to -12.7, a 15-point decline and the lowest since May 2020.

12-month inflation expectations jumped to 6%, up from 5.2% the prior month and well ahead of the Fed’s 2% goal. This squares with the recent University of Michigan survey (which reported a larger-than-expected monthly decrease in consumer confidence of nearly 10%) and the five-year inflation outlook among respondents hit its highest level since 1995. This will present a challenge for the Fed to lower rates, but also while the economy is wavering in many places.

The economic data is though at odds with what some big, old economy, US corporates are experiencing in the here and now. DIY giant Home Depot has reported a 14% increase in quarterly sales to US$39.7b and reported that same-store sales rose for the first time in more than two years. The unexpected 0.8% gain during the fourth quarter far outstripped the 1.7% contraction projected. Rising costs are though placing some pressure on margins. The shares rose ~3%.

DIY demand may be strong, but not so much for doughnuts. Krispy Kreme shares crumbled by 22% as the company missed fourth quarter expectations. Revenues fell 10% from the third quarter to US$404m. Organic sales rose for the 18th consecutive quarter, but earnings fell short of estimates, and a cybersecurity incident caused a US$10m hit to profits. Guidance came in lighter than expected. The company though does have an expansion of its distribution deal with McDonalds to look forward to. Its pastries are in 1,900 Golden Arches and this will rise to 6,000 by the end of this year and double to 12,000 by 2026.

A focus on healthier eating habits, and weight loss, may also be a factor for the doughnut maker. The latter has been a bonanza for makers of weight loss drugs. Him & Hers Health though fell 20% after quarterly margins fell short of expectations. The company offers a cheaper version of GLP-1’s and the FDA has announced that a shortage of the drug semaglutide has been resolved. The shares are still up over 300% over the past year.

A stock that has fallen away since the pandemic is Zoom Communications which fell 10%. Quarterly revenues ticked up just 3.3% and full-year revenue guidance of between US$4.785 billion and US$4.795 billion disappointed. Investors have zoomed out since Covid – the shares are down over 85% since their 2020 peak.

Federal employees may be eager to spend as much time in the office as opposed to zooming. Elon Musk has maintained his threat to fire employees who fail to submit a list of five or so of their workplace accomplishments over the past week. He has posted “Subject to the discretion of the President, they will be given another chance.” The office of Personnel Management contradicted his initial threat, saying any response is voluntary. Mixed messages.

Across the Atlantic, the STOXX50 fell 0.1% while the FTSE100 added 0.1%. The German DAX was flat in the wake of the election. Germany’s economy shrank by 0.2% in the final quarter of 2024 compared with the previous quarter. Exports decreased substantially 3.4%. A bit of work for the new government. Meanwhile in the UK, PM Keir Starmer has announced cuts to international aid to fund increased defence spending. Starmer plans to raise military expenditure to 2.5% of GDP from 2027, and plans reducing the aid budget to 0.3% of GDP from the current 0.5%. The shift would free up an additional £13.4bn per year for defence. Defence stocks rose with BAE Systems continuing its recent run, up 4.2%. Prosthetics manufacturer Smith & Nephew jumped 5.5% after its full-year profit and revenue exceeded downgraded expectations. A rebound in its US knee and hip implant business helped offset ongoing challenges in China.

In Asia, markets were mostly lower. The Nikkei fell 1.4%, despite Japanese trading houses rallying (Mitsubishi soared 9%, and Mitsui rose 5%) after positive comments from Warren Buffet about the conglomerates in his latest letter to Berkshire shareholders. The Hang Seng was 1.3% lower. The Kospi in South Korea fell 0.6% as the country’s central bank unexpectedly cut rates to stimulate a slowing economy. Officials have cut the 2025 growth outlook to 1.5% from its 1.9% forecast in November, with U.S. tariff policies one factor.

New Zealand

It was another weak day for the NZX. Ryman was back trading but below what is called the theoretical ex rights price. In other words, below where it should after adjusting for the increased share issuance. Shares in the retirement care operator closed 21% lower at $3.08 – against a theoretical price of $3.90.

The weakness leaked through to the broader market and the NZX50 fell another 1.79% to 12,307. Mercury fell 5% following its result, while Tourism Holdings was 6.6% lower following its numbers (see yesterday’s note for more on both). Other prominent movers included Vulcan Steel down almost 7% and Oceania Healthcare down 5.3%. Market heavyweight Fisher & Paykel Healthcare held up well, and was down just 0.1%.

Meridian Energy has reported a net loss after tax of $121 million for the half year, down from $191 million a year ago. Operating cash flows dropped significantly from $303 million to $50 million. The results were heavily impacted by the cost of hedge contracts due to record low inflows and a domestic gas shortage.

Earnings (EBITDAF) fell from $443 million to $257 million, and underlying net profit turned into a $5 million loss. On the retail side Meridian has though maintained its interim dividend and is focused on “managing risks for winter 2025,” including a new agreement with NZ Aluminium Smelters to reduce demand by 50MW, and seeking rule changes for hydro storage access tocome over the remainder of the financial year. “On the retail side, Meridian has achieved record market share of electricity connections, at 16.58%”.

Meridian meanwhile continues to invest, committing over $1 billion to new renewables development projects as part of the wider transition. Consents for the Ruakākā solar development and Mt Munro Wind Farm have been finalised alongside a Power Purchase Agreement for the Tauhei Solar Farm, and a joint venture for the Te Rahui solar farm.

The earnings season has confirmed 2024 was a tough time to do business. More optimistically, things should get better in 2025, although the speed of recovery is now becoming topical.

Australia

The Aussie market was lower on Tuesday, with the ASX200 easing 0.7% to 8,251. CBA and NAB were down over 1%, while ANZ dipped 0.7% and Westpac was flat. BHP declined 1.2%. Block fell 3.5% and Domino’s Pizza Enterprises fell 10.5% on their respective results (see yesterday’s notes).

It was better news for Woodside Energy which jumped 2.3% as full year net profit more than doubled. Underlying earnings fell 13% to US$2.88b due to lower oil and gas prices. The dividend was trimmed slightly. Production though reached a record 193.9 million barrels of oil equivalent, boosted by the new Sangomar oil project off the coast of Senegal. Management said “excellent” progress was being made on Woodside’s major growth projects – including Scarborough in Western Australia (80% complete and on track to ship its first cargo in 2026).

There were some sharp fallers elsewhere. Shares in insurance and construction group Johns Lyng Group fell 33% after downgrading its 2025 earnings guidance. Progress on its NSW and US-based projects has been slower than expected. Full-year earnings are expected to be $126.5 million, 4.5% lower than prior guidance. Full-year revenue guidance was reduced 5% to A$1.2 billion. Net profit fell by around a third to A$20.8 million in the first half. The company had a cost production program underway. Petrol and diesel supplier Viva Energy fell 27% after a 20.1% fall in full-year profit to A$254m on falling refining margins and lower demand in the convenience retailing business.

Nine Entertainment made for better viewing. The shares rose 3.7% despite a 15% fall in half year earnings to A$268.4m, on weaker advertising conditions, and loss of revenue from Meta. Weaker earnings offset a strong contribution from real estate platform Domain, which is the subject of a A$2.7 billion takeover bid from US suitor CoStar.

This morning, insurance broker network Steadfast Group’s has reported a 14% increase in first half earnings, driven by acquisitions and 7.9% growth in gross written premiums. The company lifted its dividend, but has lowered its full year earnings guidance to a range of A$585 - $595 million, down from A$590 - A$600 million.

Comments from our readers

No comments yet