Markets Live: Friday, 19th July, 2013 This is the transcript of the Markets Live session ending at 11:48 on 19 Jul 2013. Was busy uploading some housing related pics But first, today's portrait That's the guy now running Detroit Do we fall sorry for the people of Detroit Detroit has filed the largest municipal bankruptcy in US history, setting the stage for a costly court battle with creditors. The bankruptcy, if approved by a federal judge, would force Detroit's thousands of creditors into negotiations with the city's Emergency Manager Kevyn Orr to resolve an estimated USD 18.5 Bn in debt. Michigan Governor Rick Snyder said he saw no other options for Detroit and approved Orr's request to file for Chapter 9 bankruptcy protection. Snyder said, "Detroit simply cannot raise enough revenue to meet its current obligations, and that is a situation that is only projected to get worse absent a bankruptcy filing." As Reuters notes, the future of retiree pension and health benefits for thousands of city workers hangs in the balance. That's just from the BNY morning briefing Important announcement This will be a SHORT session Closing it down at 11.45 I have some important contact development work to do Guess we should crack on then. My Reuters screen is down Actually, it's the web connection, but not fixed yet So what's happening Bryce? Well, we're drifting. FTSE off 22 points at 6612. Similar across Europe Very little to blame it on, really - except perhaps the whole "put your rates up for Detroit" thing - so we're blaming tech results overnight. While moves overnight in Tokyo Think the Nikkei was down 3.5% at one point I think it's just nerves tho Nikkei been grinding higher again People were rattled by that 7% mini crash in May Election this weekend in Jpan of course As for the US overnight ............. Microsoft the big miss Sales miss, EPS miss. $900m charge to cover the cost of trying to shift Slates Which I think is about $500m less than they've spent advertising them. The failure of Slate's a minor drag on profitability though. Really, this is a "death of the desktop PC" story. Here's BMO's summary ........... Over the last two quarters, Microsoft has successfully bucked the material decline in the PC market via tremendous 40%+ growth in non-OEM Windows revenues and strength in non-PC enterprise demand. The PC market decline is not getting any worse, but non-OEM Windows revenue growth is slowing, enterprise IT budgets are under pressure, the shift to Office 365 is weighing on near-term Office revenue growth, and the EDD unit is slowing ahead of the Xbox One launch. Moreover, Windows margins are under heavy pressure as Microsoft discounts Windows 8 to kick-start growth and as Surface weighs on Microsoft's profitability. We don't see an offsetting near-term catalyst, and hence we conclude that Street estimates are likely to drift down and that the year-to-date rally in Microsoft shares is likely over for now. MSFT indicated -7% AH. June Q across the board miss in EPS, op margin, revs and cash flow (see variance page 3) marks beginning of a shift in business model pressured by shift to devices and services. -15% OEM Windows revs may very well mark the bottom in PCs but we have limited confidence in the ability of Win 8.1 to turn things around. Windows op. margin decline to 45% adjusting for $900 m inventory write-off for Surface RT from 58% in March Q is emblematic of shift to low margin devices and discounted pricing for tablets but opens the door to the question of how low op. margins can go before discounted pricing spurs volume increase and Surface unit growth scales cost structure better. The bright spot was better than expected billings but margin and growth issues will outweigh it. The Street thinks the shift from license to cloud subscriptions in Office and Server and Tools (Azure) is hurting margins but the real driver is discounted Windows pricing for tablets and COGS pressure from devices and capex to build out Azure (margins in MBD and S&T were ironically better than expected). This coupled with the management reorg gives the company a chance to reset the margin structure in F14 to accommodate the shift gracefully but we may have missed a chance with June Q. Better late than never. Tricky industry shifts call for unconventional resets but could be the right thing for investors. Although we lower F14E revenues and EPS from $85.5bn and $3.13 to $81.8bn and $2.72, confidence level in these estimates is low since the unit and price driver assumptions are in a flux. Our recent take on the reorg was that it was not going to de-risk a secular shift in PC industry. Rather, it introduced a new set of business model and operational risks. June Q results, sadly validate this stance. We would get more constructive if we can understand the margin structure and gain confidence in Windows. Otherwise, history tells you that lower margins = lower valuation. Our PO goes to $36 from $37 and we reiterate Neutral rating. And how about Google Well, yes, though a messy one. EPS of $9.56 versus consensus of $10.80 ...... They've been paying quite a bit of it Tax rate came in at 24% vs. 19% expected. Plus the dollar working against it. Plus Motorola still being rubbish. Will it stop being rubbish soon? It'll have to release a phone someone wants to buy. That'll help. Oh, and there's some change to the Adwords network I couldn't quite get my head around. Sellside remain buyers of Google, across the board. JMP Securities is typical. We reiterate our Market Outperform rating on Google shares and raise our price target to $975 from $955 as we believe multiple catalysts exist in the back half of the year that outweigh Google's mixed 2Q13 results. Specifically, we believe the full migration to Enhanced Campaigns, the pending launch of the Moto X, a potential refresh of the Nexus 7, the continued adoption of Product Listings Ads, and strength across Google's "younger" businesses such as mobile, display, and video can all act as catalysts. 2Q13 results were mixed. Total revenue of $14.1 billion missed our projections by 1.4% and consensus estimates by 2.1% largely on slower growth within Google's Network Sites. PF EPS of $9.56 came in below our $11.01 projection on higher costs across all of Google's lines, although we note a somewhat higher tax rate and a 1x charge related to depreciation on Google's real-estate portfolio accounted for ~$0.60 of the EPS miss. Google shares traded down 4% in after-market trading to $873, implying a 16.4x P/E multiple based on our new 2014 PF EPS of $53.19. Our $975 price target is based on ~18x our updated 2014E PF EPS. Our ~18x multiple represents a one-turn discount to Google's average forward-year multiple of 19x since 2008, but as mobile monetization improves, Display continues to gain share, Motorola launches new products, and operating losses improve, we believe shares could return to this historical range. What We Liked: Six million campaigns have migrated to Enhanced Campaigns with minimal disruption. Google plans to have all campaigns fully migrated to Enhanced Campaigns by the end of July. YouTube is taking share of brand budgets, with mobile revenue ramping. YouTube's mobile revenue has increased 3x since the start of 2013 and we believe ~40% of videos viewed are from mobile devices. Overall core & ROW growth ex-UK were strong on an FX and hedging neutral basis. Why "rest of world ex UK"? What concerned us: CPC declines worsened during the quarter. We were surprised to see Google's CPC decline 6%, reversing an improving trend. Traditional factors led to the decline, but we believe the switch to Enhanced Campaigns and lower Network Sites revenues in 2Q may have played a larger role. Network revenue missed our projections by 10%. We believe Google's updated software download policy is beneficial longer-term, but it will continue to impact Network Sites growth through 1Q14, in our view. Motorola's PF Operating Income loss significantly worse than expected. What's moving in London? Very little. ARM Holdings PLC (ARM:LSE): Last: 896.50, down 24.5 (-2.66%), High: 906.00, Low: 895.00, Volume: 2.36mBlock For reasons outlined above. As if Surface being a flop changes the numbers for Arm by one micron ..... What can we say ion Vodafone request on the right earlier on... Vodafone Group PLC (VOD:LSE): Last: 192.70, up 1.35 (+0.71%), High: 906.72, Low: 191.05, Volume: 39.76mBlock We can say that Q1 was in line, in spite of Germany heating up again And that guidance is unchanged. India's improving, Germany's deteriorating. India from a very low base and Germany from a relatively high one, admittedly. We can also note Verizon Wireless numbers overnight, which were rather mixed. Sorry - not overnight. Afternoon. Positive guidance, bit weak for the quarter. Does any of it change the interminable "will they won't they" argument? SocGen, sellers of Vodafone, have found enough in there to justify their "sell." Main surprises Vodafone (Sell, 100p) - Headline figures relatively in line, Y/Y growth trends still deteriorating. Vodafone reported an organic Y/Y growth rate of -3.5% against a weakening consensus of -3.7%. Over the last three months consensus estimates for revenues for FY13/14 have reduced by 1.3% (-0.7% adjusted for forex) and -1.0% for EBITDA (-0.4% adjusted for forex). Deterioration is also evident in declining sequential revenue growth over last four quarters, i.e., -1.4%, -2.6%, -3.2% and today -3.5%. Importantly, last quarter Vodafone reported a 4.2% Y/Y fall in revenue but attributed 1pp of that reduction to a one-off effect (i.e., the impact from the "leap year," which added one additional day to Q412/13). As a result, it looks as Vodafone's revenue profile continued deteriorating. What are the main drivers? Revenue growth in Germany deteriorated from the last quarter (-5.1% vs -3.5%) due to more "intense price competition in both the consumer and enterprise segments). In contrast the UK improved from -4.5% vs -6.6%. Italy was weak albeit relatively in line with previous quarter (ie -17.6% vs -17.0%). FY guidance (for adjusted operating profits and FCF) was reiterated (guidance in revenue was dropped last year). 100p price target??? That's absurd, with a market price of 192 or so and a company of this size There's validity in putting the numbers into the spreadsheet and printing whichever number comes out at the end. Though, in truth, I do suspect most analysts use the same pricing process as is employed for hoola hoops in The Hudsucker Proxy. Merrill still buyers. Vodafone has reported Q1 revenues & KPIs that were marginally ahead of expectations: - Group service revenue growth has rebounded from -4.2% (Q4) to -3.5% (Q1). This is the first improvement in service revenue growth for five Qs - and is good news given the high correlation between top-line growth and the share price. - In terms of key markets, Vodafone India saw service revenue growth accelerate markedly, from +7.8% (Q4) to +13.8% (Q1). Net adds remain strong, while price increases have boosted ARPU. - Vodafone UK (Q4: -6.6%, Q1: -4.5%) and Vodafone Spain (Q4: -12.7%, Q1: - 10.6%) have shown encouraging signs of perhaps having bottomed out. Competition is intense in both markets, but trends are "less bad" than before. We see the UK business as bottom-of-mobile cycle, while LTE should improve revenue trends as of 2014. However, Vodafone Italy (Q4: -17.0%, Q1: -17.6%) and Germany (Q4: -3.5%, Q1: -5.1%) remain tough. We remain BUYers: - revenue growth should improve in coming Qs - we see high probability of a US asset sale or premium merger - the DPS yield is over 5% - stock is trading at 10.5x cash earnings @Phil: I'm more confident in the current guy than the previous two, though that's not really saying much. Just looking at these WH Ireland figs Saying buying the Seymour Pierce private client business has helped But i wonder how much It's as if the entire small cap UK broking business is going the same way as our biz It's jsut dying out right in front of our eyes Between robots and regulation, small cap specialists been crushed Does feel that way, yes. Lots of talk of late about more consolidation ...... The big punters all been scared away Underminer - yep. sunset industry You saw this Kleinsclusive earlier this week? Oriel Securities, one of the most prominent names in the City's broking sector, is casting around for a merger partner amid continuing pressure on industry revenues. Sky News understands that Oriel, which is led by Simon Bragg, its chief executive, has in recent weeks begun holding discussions about a tie-up with Panmure Gordon, another mid-cap broker, according to people familiar with the situation. That's been an on-off deal for, what, three years maybe? Maybe they should get on and do it Ed Warner still chair Panmure? Havent seen him for a while Anyway, feel i get is that Kleinman story may be stale now. But we all know everyone talks to everyone. In the absence of corporate news How about some house price stuff There'sa big note from Goldman out looking at houses across Europe kevin Daly and team let me just share the front page Housing and the Euro area crisis: Instrumental in places, incidental in others While a housing boom and bust lay at the heart of the US financial crisis, the role that housing has played in Europe's sovereign crisis has been more mixed. For Spain and Ireland, housing also played a lead role in the crisis; for Greece, the decline in house prices was as much a consequence of the crisis as it was a cause of it; while, for Portugal and Italy, housing has been largely incidental to the crisis (at least so far). Outside of the Euro area, the resilience of UK house prices has surprised many. Housing adjustment: Complete in places, incomplete in others Five years since house prices in Europe peaked, we analyse developments in Europe's largest and most crisis-ridden economies. We find that the situation is marked more by its contrasts than its similarities. Promising prospects in Germany and the UK... In Germany, house prices remain cheap on our preferred valuation metrics and momentum is now strongly positive. In the UK, housing valuations are supported by a lack of housing supply and, relative to the cost of renting a house, purchase prices are below our estimate of long-term "fair value." Recent UK policy initiatives are also helping to push prices higher. ...near the bottom in Ireland, Portugal and, perhaps, Greece... In Ireland, national house prices have fallen by 50% from their pre-crisis peak - more than in any other peripheral economy - and the post-crisis housing adjustment appears to be more complete. House prices in Portugal grew moderately prior to the crisis and, for all the other risks that this economy faces, housing does not appear high amongst them. In Greece, the adjustment in house prices appears well progressed but momentum remains negative. ...incomplete adjustment in Spain, France and Italy In Spain, house prices remain above our estimate of long-term fair value and momentum is significantly negative. In France and Italy, house price valuations appear relatively stretched, having registered sharp gains prior to the crisis and limited declines since. For these economies, we believe the housing market remains a key downside risk. And maybe some charts given that i went to the trouble of uploading them Ok, well maybe the rest will end up in the usual place This London boom stuff is making me very nervous. London house prices are set to surge six per cent this year - adding £30,000 to the value of a £500,000 family home, a top estate agent said today. The new projection comes on the day official figures showed mortgage lending at its highest level since the banking crisis, as buyers flood back into the market. Experts at Savills said they had ripped up their "premature" prediction of "flat" prices in central London after stamp duty rises in last year's Budget failed to slow down growth. Bananas to sell more, says seller of bananas. I should reveal that Bryce has just taken the plunge Sold Vancourver, bought london Yeah, but I've not really bought in London. I've bought in a developing high risk third-world economy known as Harlesden. It doesn't work on the same economics as the rest of this stinking, fetid city. Ah, I like London in the sun If I wanted sun I'd live somewhere nice. Bloody sun. Yup, five minutes left...... Chemring downgrade to note. Chemring Group PLC (CHG:LSE): Last: 305.20, down 15.9 (-4.95%), High: 316.90, Low: 304.40, Volume: 467.13kBlock (Hey Underminer - thanks for the book! Just been delivered) We are reducing our price target to 330p from 360p and moving to a Neutral rating after reducing our FY14 and FY15 EBITA forecasts by 11% and 13%, respectively. Our new forecasts reflect a lower base of underlying EBITA in FY13 than we had previously forecast and the restructuring plan presented at H1. We believe the implementation of the restructuring plan by the new management team is likely to drive an improvement in Chemring's profitability and cash flow, despite the headwinds from tough defence markets. We estimate there is further upside of c£5-10m to EBIT, above the targeted £10m cost savings, from an improvement in execution across the businesses and have reflected this in our forecasts. We are concerned about the continued uncertainty on the short term outlook for US defence budgets as sequestration has not been fully implemented. This presents a challenge to management efforts to restructure Chemring in the short term because of the short cycle nature of many of Chemring's businesses. After reducing FY13 guidance at H1, we believe that stabilising earnings and tangible signs of restructuring are likely to make us consider becoming more constructive on the stock. Our new 330p PT is set at a 10% discount to our 360p fair value based on an EV/EBITA 14E multiple of 10.5x derived from a DCF and reflects medium term EBIT growth of 4.6%, 9% WACC, and cash conversion of 85%. I've a feeling UBS is house broker, but they might not be, so check that for yourself. And as for the smalls..... We have another update from Sirius. Sirius Minerals PLC (SXX:LSE): Last: 18.00, down 4.5 (-20.00%), High: 21.75, Low: 17.75, Volume: 17.21mBlock The increasingly cheap, ludicrous potash play that's sucked in every retail punter with £1k of redundancy money to burn. So the AMEC report's grim reading for investors. I call them "investors" ... AMEC "does not believe there is a significant market for polyhalite and therefore stated economic benefits are unlikely to occur." Er, this is a bit of a blow Company says the report's flawed, not least because they've not taken account of their uptake agreement .... with China .... Because they always happen exactly to plan. Let me check if Liberum has a buy note out. Event: SXX has announced that the North York Moors National Park Authority has published a second document on its website prepared by AMEC titled "Review of Major Development Test: National Need and Local Economy." This document concludes that it does not believe there is a significant market for polyhalite and therefore the stated economic benefits of York Potash are unlikely to occur. This is followed with a view that as polyhalite cannot be sold in sufficient volumes, the economic and employment benefits cannot be realised. Sirius state that there are a number of omissions in the report and that these will be addressed by the Company. SXX notes this report makes no reference to any national need to create jobs and growth while making no reference to the Company's extensive crop study programme and results to date (including the 1Mtpa Chinese off-take agreement). This follows a quote printed this morning in the Times by Chris France, director of planning at the park authority, who said that it would be "months, not weeks" before a decision was made on the planning permit for York Potash. SXX has also announced that it has signed additional agreements and commitments purchase 700,000 additional tonnes per annum of polyhalite with fertilizer distributors and manufacturers operating in various countries including Mexico, Chile, Ecuador, Thailand and Indonesia. This 700,000 additional volume is comprised 300,000 tonnes in a Framework Sales Agreement and 400,000 tonnes under letters of intent between customers and KEYTRADE under their existing agreement. iberum view: We believe SXX will be working to address AMEC's environmental concerns and perceptions regarding the validity of the Polyhalite product in the short term. We would argue that the forward sales agreements go some way to addressing the latter already. We agree that it seems unlikely that these issues will be resolved quickly, and anticipate further announcements soon outlining the timeline through to a new planning committee meeting date as well as Sirius" response to the key points in the AMEC report. Recommendation: The stock has entered a period of relative uncertainty while these issues are resolved. Ultimately a positive outcome for the approval process would provide a substantial boost for project momentum and drive the share price. At this stage we leave our NPV unchanged but note that a revised timetable will likely have some impact to valuation. Now, my concern is: does Sirius have enough cash? Think they said yesterday they have £10m. But the timeline's uncertain now, to say the least. Will that cover them for any eventuality? I fear you are on to something here I don't know the answer to that. Does anyone? Anyway, that's us done I think I have meetings to go to And the rest of AV is taking a summer Friday Thanks for the comments (and advice) Rabble Yeah, I have a newspaper to write, sadly. In the sense that I'll be writing it sadly. Thanks for tuning in, everyone. Back next week.