Let’s take a look at some top stories across the markets, including conflicting reports on the likelihood of a crude oil production cut agreement from OPEC and Russia, implications of the G20 Summit this weekend, HP’s solid fiscal fourth quarter report, and Altria’s potential acquisition of a stake in noted private e-cig maker Juul.
By Kris Rosemann
Volatility in the crude oil market (USO) is nothing new, but investors have been whipsawed quite notably of late by a number of conflicting reports that have potentially meaningful implications on the direction of crude oil prices in the near term. Reports that Russia (RSX) was in agreement with Saudi Arabia (KSA) over the need for production cuts provided a boost to the price of the black liquid November 29, but since then a conflicting report surfaced and pushed prices lower once again.
The latest report suggests that the Russian energy minister has expressed comfort with the current level of oil prices, and the country could oppose an OPEC-led production cut. Russian President Vladimir Putin also reportedly stated that Russia would be content with crude oil prices at $60 per barrel, or only slightly higher than current Brent prices. While it may be nothing more than political posturing and an attempt to muddy the outlook, the markets are likely to remain jittery at the least until OPEC officials meet December 6-7.
It seems increasingly likely that OPEC will work toward a production cut agreement to reduce supply and provide a boost to languishing oil prices, which have fallen roughly 30% since reaching four-year highs in early October, but Russia dragging its feet and the geopolitical pressure surrounding Saudi Arabia regarding the killing of journalist Jamal Khashoggi complicate matters. Leaders of both countries will have a chance to meet this weekend, along with President Trump, at the G20 summit in Buenos Aires, though the trade policy implications of the meeting of Trump and China’s Xi Jinping are currently overshadowing any potential negotiations regarding the crude oil market.
A total elimination of tariffs between the US and China (FXI) in the near term may be unlikely, and the meeting could be the last chance for the leaders to avoid a significant escalation of tensions. The best case scenario at this juncture might be a temporary pause on tariffs, or an agreement to not escalate matters further, and President Trump continues to be confident that China wants to make concessions. The Trump administration has pointed out weakness in the Chinese stock market–the Shanghai SE Composite Index is down nearly 22% in the year-to-date period–as proof of the impact of its policies, and the unexpected drop in the China PMI survey released November 30 revealed slowing orders domestically and from abroad, which marked the first time in two years the country’s massive manufacturing space saw stalled growth.
Previously enacted tariffs impacted HP’s (HPQ) operating profit in its fiscal fourth quarter, results released November 29, as its non-GAAP operating margin contracted by 20 basis points as a result of growth investments in ‘Printing’ and tariffs and higher commodities and logistics costs in ‘Personal Systems’ not being able to offset higher volume and average selling prices in ‘Personal Systems.’ The company believes its plan to mitigate the impact of tariffs is on course and the impact should ease moving forward, barring another change to trade policy such as additional or increased tariffs. CEO Dion Weisler noted, however, that demand for its products remains robust despite the uncertainty surrounding trade policies, and the company could have done better on the top-line if it weren’t for the impact of supply chain constraints.
Nevertheless, net revenue rose 10% in HP’s fiscal fourth quarter on a year-over-year basis, and non-GAAP diluted earnings per share leapt 23% to $0.54. Free cash flow in fiscal 2018 climbed nearly 22% from fiscal 2017 to $4 billion despite a 36% jump in capital spending, and this cash flow strength was more than enough to cover cash dividends paid in the fiscal year of $899 million. The company holds a reasonable net debt position of $821 million as of the end of fiscal 2018, and its Dividend Cushion ratio is an impressive 3.3 at last check. Shares yield roughly 2.8% as of this writing.
Simulated Dividend Growth Newsletter portfolio idea Altria (MO) continues to feel the pain of potentially increased regulations, but we continue to be of the opinion that impact of the long and winding potential legal battle that is likely to be a result of the FDA working to deliver a useable strategy to ban menthol cigarettes may be overblown at this juncture. The company also recently made headlines recently after CNBC reported it is in talks to take a material minority stake in privately held e-cigarette company Juul, which has also received notable scrutiny from the FDA due to the popularity of its products among teens.
Juul is currently estimated to hold roughly 75% share of the US e-cigarette market, and the presence of Altria as a material stakeholder has the potential to give it the experience of a big tobacco company that has spent decades battling regulation and litigation, while giving Altria a significantly increased albeit indirect presence in the e-cigarette market. Any potential deal is not likely for some time as both companies declined to comment on the matter, and the tie-up would mark a reversal of Juul’s previous strategy of distancing itself from big tobacco. A private funding round in summer 2018 valued the e-cigarette company at roughly $16 billion.
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Kris Rosemann 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.