US-China Trade Spats Continue, More Reports
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Trade spats between US and China are back in the news. President Donald Trump has set Friday for a tariff increase (raising the tariff from 10% to 25% on $200 billion worth of Chinese goods), but we think the move is primarily to bring China back to the negotiating table as the White House believes China is “reneging” on some of its trade promises. Chinese Vice President Liu He is planning to visit the US this week, but there may be structural barriers preventing the two countries from being able to come together in a long-term accord.
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The US may be too rigid in its demands, and China may not be able to put into place the needed reforms, or perhaps may be unwilling to do so. Further, it remains to be seen what China views as losing a trade war. In some respects, it may be more acceptable for the country to face an economic downturn as a result of trade spats than to cave into the demands of the US. What is clear, however, is that trade uncertainty is bad for the stock market, especially as market observers grapple with the question of how it will impact long-term growth, which is a key driver to intrinsic value estimates.
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We don’t think investors should read too much into the developments. Trade uncertainty has been a key part of the list of risks that the market has been facing for a long time, and we don’t believe either the US or China will do anything irresponsible that truly puts global economic health at risk. Economic performance at both countries isn’t bad, by any stretch, so now may be as good a time as ever to be at the negotiating table. It also means both countries won’t be easily willing to cave to the others’ demands. We may be hearing about US-China trade relations for some time yet.
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No changes to the newsletter portfolios.
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In alphabetical order by ticker symbol: AIG, BUD, BYND, EMR, FMC, MOS, SYY
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American International Group (AIG): AIG reported better-than-expected first-quarter results May 7, as the company recorded improvements in underwriting fundamentals and better expense controls. Total consolidated net income advanced to $3.9 billion in the first quarter of 2019, up from $3.3 billion in the prior-year period. Adjusted after-tax income came in at $1.58 per share compared to $1.04 per share in last year’s quarter. Management indicated that it expects to “reach a double-digit adjusted ROCE for consolidated AIG within three years.” We liked the results, but we still prefer Berkshire Hathaway as our play on insurance. View AIG’s stock page >>
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Anheuser-Busch Inbev (BUD): AB-Inbev reported first-quarter results May 7 that missed the mark. Underlying performance wasn’t bad, however, with volume growth of 1.3%, revenue growth of 5.9% and EBITDA growth of 8.2% on a year-over-year basis. The company noted it achieved double-digit volume growth in Brazil in both its beer/non-beer businesses and gained market share in the US, pointing to the “best quarterly market share trend performance since 4Q12.” AB-Inbev also reiterated its commitment to reach a net-debt-to-EBITFA ratio under 4x by the end of 2020. View AB-Inbev’s stock page >>
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Beyond Meat (BYND): The IPO market appears to be very healthy. Whether that is good for long-term investors remains to be seen, but it seems preferred clients by some of the underwriters are likely making a bundle flipping new issues. Here is one example: Beyond Meat updated its IPO filing April 22 to price 8.75 million shares in the range of $19-$21. The company ended up pricing shares at $25 each, and on May 2, it opened at $45 per share, trading as high as $53+ that day. Shares are currently trading in the mid-$70s at the time of this writing. The underwriters may have gotten its valuation completely wrong, if the market price is anywhere close to intrinsic value. However, it’s more likely the market is salivating over new issues in any attempt to generate a few basis points of outperformance by flipping them. Beyond Meat continues to lose money. View Beyond Meat’s S-1 >>
Emerson Electric (EMR): Emerson reported second-quarter results May 7 that showed net sales advancing 8% (4% on an underlying basis), and GAAP earnings increasing 11% on a year-over-year basis. The quarter wasn’t half bad. Emerson noted order growth normalization in the 5%-10% range (it was 4% in March), but the company lowered both its full-year underlying sales growth guidance to 4%-5.5% (was 4%-7%) and its GAAP earnings-per-share guidance to $3.60-$3.70 (was $3.60-$3.75), the latter mostly due to higher tax expectations. Emerson said that it would be “taking actions to protect (its) full-year margin target,” as a result of weakness in upstream oil and gas markets and some manufacturing end markets. Targeted free cash flow generation remains unchanged for the year, at ~$2.5 billion. View Emerson’s stock page >>
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FMC Corp (FMC): The agricultural sciences company reported solid first-quarter numbers May 6, that showed revenue up 8% and consolidated adjusted earnings per diluted share up 9%, both on a year-over-year basis against recast first-quarter 2018 numbers. FMC Corp increased its full-year revenue outlook to the range of $4.5-$4.6 billion, which reflects an improvement of 6% relative to recast 2018 performance. Adjusted EBITDA and full-year adjusted earnings guidance were also hiked, now reflecting expectations for growth of 8% and 9%, respectively, at the midpoint of the ranges. Strong pricing and cost management will remain key to achieving the updated expectations, given higher material costs and currency headwinds. View FMC Corp’s stock page >>
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Mosaic (MOS): Mosaic, one of the largest products of concentrate phosphate and potash crop nutrients, has seen better days. While the broader stock market has advanced considerably since 2011, Mosaic’s shares have fallen to a third of their original value. The company reported first-quarter results May 6 that showed net earnings and adjusted EBITDA advance and the company overcoming weather and regulatory changes to do so. However, it also lowered its full-year adjusted EBITDA guidance and adjusted earnings per share guidance, the latter to the range of $1.50-$2.00 versus $2.10-$2.50 previously. Ever since the potash cartel was disrupted some years ago, potash participants have been feeling the pain. We’re not interested in the group. View Mosaic’s stock page >>
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Sysco (SYY): One of our favorite distributors of any industry reported third-quarter results May 6 that were mixed by most measures. Sysco’s sales advanced a modest 2.2%, and adjusted operating income leapt 16.6%, helping to push adjusted earnings per share above consensus expectations for the period. We liked that the company’s gross margin advanced 14 basis points in the quarter, as small moves in this area translate to big moves in earnings. Free cash flow at the food distributor came in at $1 billion for the first 39 weeks of fiscal 2019, up ~$234 million from last year’s mark. We like Sysco a lot, but shares aren’t much of a bargain at the moment. View Sysco’s stock page >>
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Related: FXI, MCHI
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.