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Luxury Rally Put to the Test as Earnings Kick Off: Taking Stock

Luxury Rally Put to the Test as Earnings Kick Off: Taking Stock

(Bloomberg) -- More than halfway through the year, luxury stocks have confounded the grim predictions of analysts calling for a difficult 2019 for the sector. Stellar performances from sportswear giant Adidas and conglomerate LVMH have pushed the the Stoxx 600 Personal & Household Goods Index to one of the best-performing industries this year. Nothing has been able to stop the surge so far, with Burberry, LVMH and Hermes all trading near all-time highs. Earnings may put valuations to the test.

Investors were rewarded this week as shares of Burberry surged the most on record following solid quarterly results, and strong demand from Chinese customers bodes well for its luxury peers too. Swatch’s better-than-expected first-half is also adding to the positive sentiment. And yet, Richemont’s results out today were a miss, so we shall see how the market reacts.

Luxury Rally Put to the Test as Earnings Kick Off: Taking Stock

The share gains indicate investors expect a resolution in the U.S.-China trade war, which weighed heavily on the broader market in May, according to Luca Solca, an analyst at Bernstein. “Chinese demand is stronger than ever, it’s a most surprising situation,” he said by email. “We’ve had an appetizer with Burberry of what the upcoming earnings season may look like.”

Within the industry, polarization is likely to continue, says Morgan Stanley, with large multi-label luxury stocks outperforming smaller or single-brand ones including Hugo Boss. That means a turnaround for struggling companies like Tod’s is likely to be more difficult. Puffy jacket maker Moncler is so far the exception to that trend.

Brand heat on social-media platforms is another big factor to monitor. While LVMH is “firing on all cylinders” with its flagship Louis Vuitton brand, according to Morgan Stanley, rival Kering -- the hottest luxury stock of 2017 and 2018 -- is lagging amid signals that its Gucci label may be losing momentum on platforms such as Instagram.

One hiccup in the rally could be valuations, which are starting to be “demanding,” with the exception of Swatch, according to Cedric Ozazman, head of investment and portfolio management at Reyl & Cie. in Geneva. He plans to wait for better entry points into the sector that he deems is overcrowded in the short term, even though the long-term trend is intact.

Still, few are betting on declines. Most big names in the sector have very low short interest, while those on Swatch and Richemont stand at 3.6% and 2.7% of free float, respectively, according to IHS Markit.

NameEst.
P/E
Average Price
Target (local)
Upside
Potential
YTD
Return
Short Interest
(% Free Float)
LVMH26.6380.8-2%50%0.6%
Kering20.6552.24%29%0.7%
Richemont24.381.1-6%36%2.6%
Swatch18.2315.12%7.3%3.6%
Hermes44.9565.2-15%34%0.5%
Burberry27.02024.7-15%35%0.6%
Average26.9
Source: Bloomberg, IHS Markit

Looking at analysts’ average price targets, the big players all seem pretty much in line with current market valuation. Hermes continues to be expensive, while Burberry’s jump after earnings this week has surprised analysts. More upgrades could be on the way after Citi and SocGen raised their price target. Even with yesterday’s boost, Swatch’s valuation remains significantly lower than peers.

Luxury Rally Put to the Test as Earnings Kick Off: Taking Stock

The party could still end up turning into a profit-taking opportunity, Bernstein’s Solca says, with some investors opting for sector rotation. It hasn’t so far.

In the meantime, Euro Stoxx 50 futures are trading down 0.7% ahead of the open.

  • Watch oil stocks, with the commodity trading near a two-week low as an increase in U.S. fuel stockpiles spurred concern that demand is waning in the world’s biggest crude consumer.
  • Watch technology stocks after Germany’s SAP reported a slowdown in cloud-bookings growth and in the U.S., IBM reversed earlier gains after staying tight-lipped on its recent sizable acquisition and Netflix plunged on a surprise drop in U.S. subscribers.
  • Watch European automotive stocks, especially those with truck operations, after Volvo’s second-quarter earnings beat analyst expectations, as truck deliveries rose and the company increased its market forecasts for North America and Europe this year.

COMMENT:

  • “For the markets to continue melting-up notably, a few things likely have to occur,” UBS Wealth Management Chief Investment Officer Mark Haefele writes in a note. “First, 2Q earnings have to be satisfactory, while forward guidance still indicates a reacceleration by 4Q. Second, global growth has to stop slowing and show signs of cyclical improvement. Third, central banks have to meet dovish expectations with dovish actions. Lastly, a re-escalation in U.S.-China trade tensions is avoided after the G20 re-engagement. All of this is possible, but the best of this near-term rally is likely behind us.”

COMPANY NEWS AND M&A:

  • Ray-Ban Owner in Talks for GrandVision at $8 Billion Value (2)
  • Richemont 1Q Sales Growth Misses; Says HK Sales Down on Protests
  • Alstom Confirms FY Sales Outlook, Medium-Term Targets
  • Volvo Quarterly Earnings Surge as North America Deliveries Jump
  • Novartis Raises 2019 Guidance; 2Q Core EPS Beats (1)
  • Remy Cointreau 1Q Organic Rev. Drops 3%, Sees 2Q Acceleration
  • Asahi in Talks to Buy AB InBev’s Carlton Breweries: Australian
  • SAP’s Cloud Growth Stumbles Amid Focus on Profitability Gains
  • Georg Fischer First Half Ebit Misses Estimates
  • Nordea Says It Needs to Review Capital and Dividend Targets
  • Givaudan Still Aims to Outpace Market Growth; 1H Ebitda CHF660m
  • Panalpina 1H Ebit Falls to CHF52.1m From CHF54.7m Year Ago (1)
  • Aker 2Q Net Asset Value Per Share NOK603 Vs. NOK757 Q/q
  • Ten Cate Owners Seek Sale of Advanced Armour Business: Telegraaf
  • Teleperformance Faces Allegations Over Treatment of Workers: DJ
  • Rieter First Half Ebit Loss CHF1.2 Mln
  • Bobst Group Sees FY Sales on Similar Level as Prior Year
  • Volvo Cars Profit Falls; Pricing Pressure Outweighs Higher Sales
  • Barco First Half Revenue Meets Estimates

NOTES FROM THE SELL SIDE:

  • Ubisoft reported strong 1Q results, albeit against conservative guidance, along with positive trends and commentary about upcoming releases which all gives confidence for the full year, Citi says. Still a “sharp improvement” in growth will be needed in the second half of the year.
  • Julius Baer is upgraded to buy, with consensus judged to have over-corrected and now seen overly cautious, Citi says in note on Swiss banks. Analyst note that structural pressures have abated even if cyclical headwinds remain.
  • Greggs shares are “feeling full,” meaning investors should take profits, Peel Hunt says in a note to clients, cutting the baked-goods retailer to reduce from hold. Analysts see tougher comps and higher input costs, partly due to rising pork prices amid China’s African swine flu outbreak, making it increasingly difficult to surprise the market to the upside.
  • There’s a strategic and financial rationale for EssilorLuxottica’s potential purchase of GrandVision, a deal that would be at least 7% EPS accretive to the French-Italian eyewear giant if fully funded by debt and assuming no synergies on FY20 consensus estimates, according to RBC.

NOTES FROM THE SELL SIDE:

  • Ubisoft reported strong 1Q results, albeit against conservative guidance, along with positive trends and commentary about upcoming releases which all gives confidence for the full year, Citi says. Still a “sharp improvement” in growth will be needed in the second half of the year.
  • Julius Baer is upgraded to buy, with consensus judged to have over-corrected and now seen overly cautious, Citi says in note on Swiss banks. Analyst note that structural pressures have abated even if cyclical headwinds remain.
  • Greggs shares are “feeling full,” meaning investors should take profits, Peel Hunt says in a note to clients, cutting the baked-goods retailer to reduce from hold. Analysts see tougher comps and higher input costs, partly due to rising pork prices amid China’s African swine flu outbreak, making it increasingly difficult to surprise the market to the upside.

TECHNICAL OUTLOOK for Stoxx 600 index:

  • Resistance at 397.9 (May 2018 high); 403.7 (2018 high)
  • Support at 385.7 (76.4% Fibo); 381.5 (50-DMA)
  • RSI: 55.4

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

  • Resistance at 3,549 (July high); 3,596 (May 2018 high)
  • Support at 3,520 (76.4% Fibo); 3,417 (50-DMA)
  • RSI: 57.6

MAIN RESEARCH AND RATING CHANGES:
UPGRADES:

  • CVS Group upgraded to buy at Berenberg
  • Ericsson upgraded to buy at Handelsbanken; PT 99 Kronor
  • Julius Baer upgraded to buy at Citi
  • Orange Belgium upgraded to buy at HSBC; PT 23 Euros
  • Telefonica Deutschland raised to outperform at Macquarie

DOWNGRADES:

  • 1&1 Drillisch cut to underperform at Macquarie; PT 20.50 Euros
  • Ageas downgraded to underperform at Mediobanca SpA; PT 45 Euros
  • Allianz downgraded to hold at Bankhaus Lampe
  • Aumann downgraded to hold at Berenberg
  • Greggs downgraded to reduce at Peel Hunt
  • InterContinental Hotels cut to underperform at RBC; PT 45 Pounds
  • Kering cut to neutral at MainFirst; Price Target 570 Euros
  • Motor Oil Hellas downgraded to sell at Goldman; PT 21 Euros
  • Red Electrica downgraded to sell at Goldman; PT 17 Euros
  • Rheinmetall downgraded to hold at Bankhaus Lampe
  • Swedbank downgraded to underweight at JPMorgan; PT 130 Kronor
  • Whitbread cut to underperform at RBC; Price Target 45 Pounds

INITIATIONS:

  • Avance Gas rated new buy at BTIG; PT 50 Kroner
  • Marel HF rated new buy at Citi; PT 5 Euros
  • Marel HF rated new overweight at JPMorgan
  • Solaria Energia reinstated buy at Ahorro Corporacion

MARKETS:

  • MSCI Asia Pacific down 0.9%, Nikkei 225 down 2.2%
  • S&P 500 down 0.7%, Dow down 0.4%, Nasdaq down 0.5%
  • Euro up 0.13% at $1.1239
  • Dollar Index down 0.14% at 97.09
  • Yen up 0.24% at 107.69
  • Brent up 0.1% at $63.7/bbl, WTI down 0.2% to $56.7/bbl
  • LME 3m Copper down 0.2% at $5970.5/MT
  • Gold spot down 0.3% at $1422.7/oz
  • US 10Yr yield down 1bps at 2.04%

ECONOMIC DATA (All times CET):

  • 10:30am: (UK) Bank of England Bank Liabilites/Credit Conditions Surveys
  • 10:30am: (UK) June Retail Sales Ex Auto Fuel MoM, est. -0.2%, prior -0.3%
  • 10:30am: (UK) June Retail Sales Ex Auto Fuel YoY, est. 2.6%, prior 2.2%
  • 10:30am: (UK) June Retail Sales Inc Auto Fuel MoM, est. -0.3%, prior -0.5%
  • 10:30am: (UK) June Retail Sales Inc Auto Fuel YoY, est. 2.6%, prior 2.3%

* For a wrap on developments in Europe’s equity capital markets, click here.

--With assistance from Jan-Patrick Barnert.

To contact the reporters on this story: Albertina Torsoli in Geneva at atorsoli@bloomberg.net;Michael Msika in London at mmsika4@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Celeste Perri

©2019 Bloomberg L.P.