April 30, 2020 / 8:23 PM / 25 days ago

Breakingviews - Corona Capital: Tepid earnings, red-hot bonds

LONDON/MUMBAI/NEW YORK/DALLAS (Reuters Breakingviews) - Corona Capital is a daily column updated throughout the day by Breakingviews columnists around the world with short, sharp pandemic-related insights.

George Washington is seen with printed medical mask on the one dollar banknote in this illustration taken, March 31, 2020. REUTERS/Dado Ruvic/Illustration

LATEST

- Earnings season

- Bond market bonanza

REALITY STARTS SETTING IN FOR EARNINGS. Around half the S&P 500 Index constituents have reported first-quarter earnings, including the start of the sharp downturn triggered by the coronavirus. Profit for the group in the period is set to drop nearly 15%, according to Refinitiv data. A month ago, analysts thought the decline would be under 5%, and at the start of the year they were targeting a 6% increase.

For the second quarter of 2020, the picture is starting to look more realistic. Earnings are forecast to slump nearly 40% from last year. But with revenue projected to be down only 10% in the three months to June, Wall Street may still, unfortunately, be behind the Covid-19 curve. For every company with top-line growth, like Facebook, there are others like American Airlines, which sees industry revenue down perhaps 95% in April compared to last year. It will get worse before it gets better. (By Richard Beales)

THE FED’S WORDS MIGHT BE MAGIC. Boeing’s plan to raise $25 billion in bonds – an unprecedented amount for a non-financial company that isn’t funding a big takeover – has already turned April into a record month for investment-grade corporate debt issues, according to Refinitiv data. PepsiCo and Coca-Cola are among several companies this week that dipped in for a second time in two months, even though it’s rare for direct competitors to go head to head.

Big companies are probably spooked from the last dash for cash, and eager to fill up their coffers while the demand is so hot. But it’s pretty obvious this demand exists because the Federal Reserve, merely by saying it could buy corporate debt, has basically put a floor under the market. For as long as the central bank remains as good as its word, frontrunning the Fed should continue to be a very crowded trade. (By Anna Szymanski)

IN IT TO WIN IT? AstraZeneca has struck a deal with Oxford University researchers to produce and distribute the latter’s potential Covid-19 vaccine. The treatment, developed by the Jenner Institute and Oxford Vaccine Group, is already being tested in England. Chief Executive Pascal Soriot reckons the Anglo-Swedish drugmaker could produce 100 million doses by year end.

Flu vaccines alone bring in at least $4 billion a year, and demand for a Covid-19 version will be much higher. It could also require a new dosage every two years, Bernstein reckons. Still, it’s not clear if AstraZeneca will have exclusive production and distribution rights. Many other players, including GlaxoSmithKline and Sanofi, are working on rival products. And even if the Oxford vaccine works, the 107 billion pound group will only be pricing to cover its costs for as long as the pandemic rages.

AstraZeneca shares rose as much as 5% in early afternoon trading. That looks excessive. But the fact that a large drug group sees value in a Covid-19 treatment is encouraging in itself. (By Neil Unmack)

JUDGEMENT OF SOLOMON. Goldman Sachs investors have delivered a warning to its board. Only 71% of them supported the company’s executive pay package, which included a $27.5 million target payout for Chief Executive David Solomon, according to a preliminary tally from Thursday’s annual meeting.

Goldman has had bigger say-on-pay thwacks, as have peers. In 2016 its pay proposals garnered just 66% support. While Bank of America has polled above 90% since the financial crisis, Citigroup lost its non-binding vote as recently as 2012. JPMorgan, whose boss Jamie Dimon is the best paid of all, got just 72% support last year, leading it to tweak its incentives.

Goldman is investing in initiatives like its Apple credit card, so it’s too early to judge Solomon’s progress. But it’s not a great coda to his first full year on the job. On the bright side, it’s a chance to show that he, and the board, are listening. (By John Foley)

BIGGER FLOCKS. Chief Executive Jack Dorsey has solved, at least for now, one of Twitter’s problems. The social network is making good on growing its community. It still has a lot of work to do with sales.

Twitter on Thursday reported a whopping 24% year-over-year rise in what it calls monetizable daily active users for the first quarter to 166 million – its best rate on record. Given that Twitter is effectively a bit like a news organization, that is not too surprising. Large market newspapers in the United States saw a 6% bump in digital subscriptions just from Feb. 24 through March 23, according to Mather Economics, as the coronavirus took hold in the West.

Revenue rose only 3%, though, a challenge for Twitter even before Covid-19 snapped shut wallets. It’s an opportunity, too, though: Dorsey, fresh from a fight with activist investor Elliott Management, needs to focus on the “m” in mDAU. (By Jennifer Saba)

SLICK MOVE. Royal Dutch Shell, has cut its dividend for the first time since World War Two. Chief Executive Ben van Beurden faced the music on an investor call, talking about the short-term jolt to the oil sector from Covid-19 and the longer-term transition to greener energy. “Who knows actually where the viability of our assets will go,” he wondered at one point.

Big U.S. oil companies haven’t been as quick to accept the decline of fossil fuels, and they probably won’t be as quick to save cash by cutting dividends either. Exxon Mobil paid out $15 billion last year. Chevron put up $9 billion. Both might do well to hold back, but both carry the burden of being so-called dividend aristocrats that have increased payouts for at least 25 consecutive years. They shouldn’t wait for the kind of crunch that finally led Occidental Petroleum to slash its own regular dividend last month. (By Lauren Silva Laughlin)

TOO MUCH CAPITAL? Lloyds Banking Group’s first-quarter earnings report, unveiled on Thursday by Chief Executive Antonio Horta-Osorio, was a tale of two numbers: a 1.4 billion pound impairment charge for bad debt, and a bumper 14.2% common equity Tier 1 capital ratio. The loan-loss figure was higher than expected, but much lower as a proportion of loans than peer Barclays. The capital ratio, meanwhile, represented a 45-basis point jump from the level at the end of 2019.

That’s arguably reassuring, since bank investors have been fretting about dilutive equity hikes. It’s also a risk, however: supervisors like the Bank of England have made it clear that lenders should be burning through their equity capital to help virus-hit firms and households. Banks who exit the crisis with their buffers overflowing, ready to pay shareholders a chunky dividend, could have a rough ride in the court of public opinion. (By Liam Proud)

PUBLIC GLIMPSE. SoftBank Group is plumbing new depths with a second grim forecast. The value of investments made by Masayoshi Son outside of the Vision Fund are cratering. These are now expected to deliver losses of over 1 trillion yen, about $9.4 billion, up from a barely three-week-old forecast for a loss of 800 billion yen. Most trouble once again stems from The We Company. It means an even-bigger-than-expected annual loss on SoftBank’s bottom line – the first red in 15 years.

The Japanese company offers a unique public window into private startup valuations – accountants are clearly breathing down Son’s neck to mark its investments to some semblance of market. Still, operating performance is divorced from other reality thanks to buybacks. SoftBank stock is up 11% since the first warning in April, outperforming gains in other investments like Alibaba. There’s some fight left in the Unicorn wrangler. (By Una Galani)

HEALTHY FLU. Reckitt Benckiser is benefitting from an exceptionally heavy virus season. The maker of Mucinex and Strepsils posted a 33% increase in over-the-counter medicines in the first quarter. Throw in demand for other health products and the frantic stockpiling of things like Dettol disinfectant, and given free – if unwelcome – advertising by the American president last week, and overall sales grew 13% to 3.5 billion pounds in the quarter, excluding currency moves.

Empty shelves mean it’s not a perfect score for Chief Executive Laxman Narasimhan, who set out his strategy to overhaul the business in February. And it’s unclear how much of the sales bump is stockpiling versus sustained higher demand. But Narasimhan may have found a cure for the supply chain glitches which have plagued Reckitt in the past. The higher costs he warned of are a small price to pay for protecting market share. (By Dasha Afanasieva)

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