Wednesday 20/11/19

1. In TECH NEWS, American tech is on course for a decade-best performance, Tesla is set to make the world’s biggest lithium ion battery and Samsung plans to emulate Apple in services
2. In RETAIL NEWS, US retailers paint a mixed picture, Home Depot has a downbeat outlook and AO World quits the Netherlands
3. In INDIVIDUAL COMPANY NEWS, the Cobham takeover nears approval and US meatless companies target China
4. In OTHER NEWS, I bring you a McSmile…

So US tech is on for a notable performance, Tesla tries to outdo itself and Samsung wants some services action…

Technology stocks head toward best year since 2009 (Wall Street Journal, Akane Otani and Karen Langley) shows that tech stocks are leading the market, with the S&P500 tech sector’s 41% rise for the year versus the wider S&P500 index’s climb of 24%. This is made all the more remarkable considering the ongoing concerns and investigations regarding data usage and antitrust issues. Particularly impressive performances have come from chip-related companies like Applied Materials (+86%), Tokyo Electron (+83%), ASML Holding (+79%) and Lam Research (+100%) as well as electronic payments-related stocks like Visa (+39%) and Mastercard (+51%) but it seems that earnings in the sector have shown sharp declines in the third quarter, according to FactSet. Amazon announced its first earnings fall for two years and Netflix missed its subscriber growth target for the second quarter in a row, for instance. * SO WHAT? * I just wonder whether this performance has been flattered by the fact that the tech sector was pretty weak in the final quarter of last year. Valuations for many are now looking pretty healthy, but there could be more catalysts for growth coming up next year as 5G continues to roll out, bringing with it new business opportunities and even stronger demand. Data usage and antitrust issues continue to hang over the sector and they will need to be resolved for tech to reach the next level. In the meantime, I would have thought that investors will be looking to lock in some gains in the absence of any obvious short-term catalysts.

Tesla to expand world’s largest lithium battery facility by 50pc (Daily Telegraph, Ed Clowes) highlights a new challenge for Tesla – to make the world’s biggest battery (which it built in less than three months in 2017) – even bigger! The battery stores energy from the Hornsdale wind farm in South Australia and has the capacity to power 30,000 homes for one hour. The South Australian state

government and the Australian Renewable Energy Agency has set aside £12m for the project that will increase capacity from 100 to 150 megawatts at the site owned by French renewables company Neoen. The expansion is due to be completed by July next year (the original one was built particularly quickly because Elon Musk said if he couldn’t build it within 100 days, he wouldn’t charge for it #nopunintendedhonest) and will enhance the state’s power supply. * SO WHAT? * This is impressive stuff and is actually one of a number of large-scale battery projects in Australia. The country now generates 20% of its electricity from renewables, necessitating the need for batteries to store it all. French company Total Eren is planning to build a 270 megawatt storage facility for its Kiamal solar farm in Victoria and EPS energy is looking to build a 280 megawatt solar farm and 140megawatt battery in Robertstown. There is also a massive Goyder South project which will include up to 1,200 megawatts of wind generation, 600megawatts of solar and 900megawatts of battery storage. Wow!

Then in Samsung chases Apple’s $50bn-a-year lead in services (Financial Times, Edward White) we see that the world’s largest smartphone maker has seen Apple’s growing revenues from its services business and decided it wants a piece of the action. The company has decided to move into services for the first time after a four-year period of making big investments in software and a maturing of the smartphone market. However, it’s not clear at the moment what services they are going to start charging for, but it wants to somehow monetise its existing 1bn customer accounts and increase the use of SmartThings, an Internet-of-Things platform which lets people control electronics devices remotely by smartphone. * SO WHAT? * This all sounds lovely, but the fact that Samsung has consistently failed to make money out of music, video and virtual reality services would suggest that the latest statement of intent won’t be setting analyst and investor hearts a-flutter. Interestingly, by working with Microsoft on Windows, Google on Android and Qualcomm on chips, Samsung has put itself right in the middle of every major tech component – but whether it can properly monetise these developments is another matter!

US retailers have mixed fortunes, Home Depot paints an uninspiring picture and AO World ditches the Netherlands…

Retailer results send mixed signals on consumer spending (Wall Street Journal, Suzanne Kapner and Allison Prang) shows that, even with a strong US economy, some retailers continue to struggle as we head into the Christmas season. Jefferies analyst Randal Konik observed that “the winners keep winning and the losers keep losing” as Home Depot (DIY stores) announced disappointing sales in the latest quarter due to investments taking longer-than-expected to bear fruit while department stores Kohl’s, JC Penney and Sears continue to suffer from downward-trending sales. On the other hand, TJX (parent of TJ Maxx, HomeGoods and our own TK Maxx) manged to put in a solid sales performance for the quarter and even raised its profit forecast for the full year due to strong footfall and the availability of plenty of discounted merchandise for it to sell. * SO WHAT? * In theory, you would have thought that a growing economy, rising wages and a tight labour market would all contribute to strong retailer performance across the board – but I think that these results are just more evidence of a sea-change in consumer tastes and behaviour. I continue to be pessimistic on the long-term survival of department stores unless they can do something spectacular to enhance the customer experience and their ongoing disappointing performances just serve to reinforce this opinion.

Following on from that, Home Depot lowers sales outlook, shares fall (Wall Street Journal, Patrick Thomas) highlights lower-than-expected third quarter sales and a cut in its full-year forecast as investments in tech to

improve its online business proved to take longer than planned to feed through. The share price fell by 5% on the news after rallying by 30% so far this year. * SO WHAT? * It’s always worth monitoring what’s going on at DIY retailers as they can be an interesting reflection of consumer confidence and of the state of the property market. They tend to benefit when property prices are booming as customers flock in when they move into new homes and prospective sellers spend on DIY when sprucing up their homes to get higher prices. DIY retailers continue to do well when real estate hits the top of the market as customers decide to improve their existing homes because they can’t afford to climb further up the ladder due to higher prices – but then things get tricky when the economy is in a downward trend as activity stalls and spending on DIY takes a back seat. Judging from what Home Depot’s CFO Richard McPhail had to say, the latest weakness was purely a result of IT benefits not filtering through as overall consumer spending was actually pretty robust.

AO World cuts its losses and pulls plug on the Netherlands (The Times, Ashley Armstrong) heralds a major revision in one of Britain’s biggest online retailer’s overseas ambitions as AO World has decided to shut down its Netherlands operation after just four years. The business loses €6m annually and AO World will have to take a €3m hit from closing the business. Although chief exec John Roberts is currently talking a good game about the German business, he has given himself a deadline of next summer to sort it out otherwise it too will get shut down. * SO WHAT? * Investors seemed to warm to Roberts’ candour as the share price rose by 15.8% on this news as well as a solid performance in its British market. Roberts founded the business 20 years ago, left two years ago and then returned in January this year. This closure is all part of his strategy to grow AO’s profitability and cash generation.

The Cobham takeover nears approval and US companies take meatless to China…

UK poised to approve £4bn US takeover of defence firm Cobham (The Guardian, Jasper Jolly) shows that the government is on the verge of approving the £4bn takeover of British defence company Cobham by the US private equity group Advent International on condition that the latter takes concrete steps to address national security concerns. * SO WHAT? * The all-cash deal was actually announced in July but the government stepped in with objections from the MoD on 17th September. Interestingly, although the company employs around 10,000 people globally, it only earns about 8% of its revenues in the UK. Cobham specialises in air-to-air refuelling tech used by US and UK military jets.

US food groups take plant-based burger to China (Financial Times, Emiko Terazono and Tom Hancock) shows that vegan heroes Impossible Foods and Beyond Meat are looking to expand into China. Impossible Foods is currently considering potential partnerships while Beyond Meat is looking to start production in the country next year. * SO WHAT? * Given that China consumes almost a third of the world’s meat there is either a massive opportunity here or an insurmountable mountain to climb, depending on your point of view! Mind you, they won’t be the first to try to supply alternative protein as Omnipork (pork subsitutes) and Just (US-based plant-based egg substitute) have already generated a lot of interest. I think that such companies should put everything they can into China right now as meat prices have risen a great deal due to the after effects of the African swine fever outbreak.

And finally, in other news…

I thought I’d leave you today with the heart-warming story in Dad comes up with adorable way to keep his kids happy when they want McDonald’s (The Mirror, Luke Matthews https://tinyurl.com/vnnj2so). Nice one, dad!