Good Apple Could Help the Rest of Bunch: Taking Stock

(Bloomberg) -- With most European markets closed today for a public holiday, investors in the region’s technology stocks have extra time to digest one of the biggest events in the earnings calendar: Apple earnings. The iPhone maker beat estimates on most metrics, propelling its stock 5 percent higher in extended trading and also boosting U.S.-listed suppliers. The tech giant’s European and Asian supply chains will come into focus as markets reopen on Thursday.

Things have moved on since warnings from Germany’s Infineon and Switzerland’s AMS in February. Investors shrugged off that bad news and both stocks have been on the rise. Dialog, AMS and STMicro have the largest exposure to Apple in Europe, with the tech giant accounting for 75 percent, 20 percent and 13 percent of sales respectively. All three reported positive first-quarter updates.

Good Apple Could Help the Rest of Bunch: Taking Stock

Dependence on one customer can prove to be tricky. Dialog is the latest example but is set to see its exposure to Apple fall to 40 percent from 75 percent after the companies signed a licensing deal. The last few quarters have demonstrated the sensitivity of the suppliers to Apple’s share price reaction after its earnings. It can set a trend, even if the longer-term correlation stays low overall.

Next Day Move (%)QuarterAppleAMSDialogSTMicro
01/29/20191Q196.8%0.2%2.2%0.4%
11/01/20184Q18-6.6%-3.3%-1.0%-0.3%
07/31/20183Q185.9%-0.6%8.4%0.1%
05/01/20182Q184.4%7.0%8.7%4.6%
02/01/20181Q18-4.3%0.2%-1.6%-3.1%
11/02/20174Q172.6%-4.7%2.3%2.7%
Source: Bloomberg

The Apple-dependence goes both ways. The company is pushing to expand in services such as video, music, payments and cloud offerings, which are of little concern to the chipmakers. That said, Apple remains an iPhone company as of today. The revenue from the device is more than four times that from all its services combined, so the fortunes of many of Europe’s semiconductor companies are still very much tied to it.

Other factors should also be considered. AMS is one of the most shorted companies in the Stoxx Europe 600, so the shares move dramatically on good news when short sellers are squeezed. The company’s surge on Tuesday after it strongly beat estimates was a reminder of this. Still, this amounted to only a partial re-rating as the stock is still down almost 50 percent over the past year.

Good Apple Could Help the Rest of Bunch: Taking Stock

Other newsflow can matter too. STMicro has a 37 percent exposure to the relatively weak automotive segment. AMS, which also operates in this market, said Tuesday that conditions were less favorable with mixed demand trends across the world. It doesn’t help that China has cut electric vehicle subsidies recently. Yet, U.S. auto chip peer NXP Semiconductors beat estimates, perhaps suggesting the market isn’t so bad.

Good Apple Could Help the Rest of Bunch: Taking Stock

More broadly, several semiconductor companies have given cautious or disappointing outlooks lately (ON Semi, Samsung, Intel, TSMC), while Texas Instruments and ASML gave more positive views. European tech shares might have a lot of catching-up to do to reach the record highs of their U.S. peers, but some analysts urge caution after industry data pointed to weakness in demand and prices. That’s something to keep in mind once the Apple news is digested.

  • Watch tobacco names BAT, Imperial Brands after U.S. regulators approved the marketing of new tobacco products by Philip Morris for the IQOS heat-not-burn device. BAT makes the Glo heat-not-burn product and Imperial’s device is called Pulze.
  • Watch education company Pearson following a report that U.S. rivals McGraw-Hill Education and Cengage Learning are considering an all-stock merger.
  • Watch the pound and U.K. stocks as Theresa May is said to be hoping to wrap up talks on a compromise deal with the Labour party next week, while Labour has said it would support a second referendum only if all other options are exhausted.
  • Watch the Fed decision later today. The bank is in the midst of a strategy rethink around the perils of persisting with low interest rates to try to raise inflation while the economy looks to be in relatively good health.

COMMENT:

  • “It’s that time of the year, and EU stocks’ year-to-date jump begs consideration of the old adage of "Sell in May" as summer approaches,” Bloomberg Intelligence analysts Tim Craighead and Laurent Douillet write in a note. “Seasonal statistics argue it’s more than a myth, but technicals aren’t flashing alarms and most European markets are up only modestly since last September.”

COMPANY NEWS AND M&A:

  • Sainsbury Full Year Adjusted Pretax Profit 1.3% Above Estimates
  • Inmarsat First Quarter Adjusted Loss $272.4 Mln
  • Persimmon Sees Earnings in Line With Expectations
  • Next Maintains Full Year Pretax Profit GBP715 Mln
  • LSE 1Q Total Income up 5% Y/y to GBP546M
  • Orsted 1Q Revenue Misses Lowest Estimate; 1Q Ebitda Beats
  • Rio Says Progressing Jadar Lithium, Resolution Copper Projects
  • Vodafone Is Said to Have Found Huawei Security Flaws From 2009
  • GN First Quarter Revenue Matches Estimates; Outlook Maintained
  • Bayer Litigation Overhang Will Linger Three-to-Five Years: UFP
  • Deutsche Bank’s Asset Manager DWS Is Said to Cut 5% of U.K. Jobs
  • Lufthansa Won’t Exercise Right to Buy Back Own Shares
  • AMG Cuts Full-Year Ebitda Target on Weakness in Materials (1)
  • SAS Chairman Says Strike May Lead to 2019 Loss: Jyllands-Posten
  • Pereira Coutinho Offers to Buy Remaining 11% Stake in SAG Gest

NOTES FROM THE SELL SIDE:

  • Morgan Stanley prefers Commerzbank (equal-weight) to Deutsche Bank (underweight), as the broker resumes coverage on German banks. MS sees uncertainty on strategy and revenue outlook weighing on Deutsche Bank shares and the range of outcomes for co. “remains very wide.” Commerzbank is seen fairly valued following strong YTD performance, and capital concerns have ended.
  • Puma’s brand momentum and good growth has made defending a cautious stance on the sportswear maker difficult, but RBC says it continues to argue it will take longer than consensus thinks for the firm to hit margin targets.

MAIN RESEARCH AND RATING CHANGES:
UPGRADES:

  • Beiersdorf upgraded to outperform at MainFirst; PT 105 Euros

DOWNGRADES:

  • Deutsche Boerse downgraded to hold at DZ Bank; PT 125 Euros
  • Elkem downgraded to equal-weight at Morgan Stanley; PT 37 Kroner

INITIATIONS:

  • AB Dynamics rated new buy at Liberum; PT 26.45 Pounds
  • Commerzbank resumed equal-weight at Morgan Stanley; PT 9 Euros
  • Deutsche Bank resumed at Morgan Stanley With Underweight

MARKETS:

  • S&P 500 up 0.1%, Dow up 0.1%, Nasdaq down 0.8%
  • Euro up 0.03% at $1.1218
  • Dollar Index up 0.03% at 97.51
  • Yen down 0.05% at 111.48
  • Brent down 0.7% at $71.6/bbl, WTI down 1% to $63.3/bbl
  • LME 3m Copper up 0.2% at $6425.5/MT
  • Gold spot down 0.3% at $1279.9/oz
  • US 10Yr yield down 2bps at 2.5%

MAIN MACRO DATA (all times CET):

  • 10:30am: (UK) March Net Consumer Credit, est. 1b, prior 1.1b
  • 10:30am: (UK) March Consumer Credit YoY, prior 6.3%
  • 10:30am: (UK) March Net Lending Sec. on Dwellings, est. 3.6b, prior 3.5b
  • 10:30am: (UK) March Mortgage Approvals, est. 64,500, prior 64,300
  • 10:30am: (UK) March Money Supply M4 MoM, prior 0.3%
  • 10:30am: (UK) March M4 Money Supply YoY, prior 1.2%
  • 10:30am: (UK) March M4 Ex IOFCs 3M Annualised, prior 2.3%
  • 10:30am: (UK) April Markit UK PMI Manufacturing SA, est. 53.1, prior 55.1

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