Insights

Arguably the best result last night came from Shopify, which beat analyst expectations by nearly 30% as its AI capabilities attracted more merchants to its e-commerce platform. By contrast, there was a rare miss from Novo Nordisk, with its weight-loss drug Wegovy undershooting expectations. Disney posted its first ever profit from the combined streaming businesses of Disney+, Hulu and ESPN+, but warned of more challenging trading in its theme parks. Occidental Petroleum beat consensus on higher production and crude prices.

We are nearing the end of US reporting season and tomorrow will see the last in our series of daily updates for this quarter. The highlight tonight will be the Q2 result from the health care giant Eli Lilly.

Walt Disney

Disney comfortably exceeded consensus EPS estimates, driven mainly by a much better performance in the Entertainment division. The combined streaming businesses of Disney+, Hulu and ESPN+ posted a profit for the first time. Revenue was in line with forecasts and up 4% yoy with weaker sales and licencing of content offsetting a better-than-expected performance by US theme parks. After the strong Q3 EPS performance, Disney said it anticipates full year EPS growth of at least 20% (consensus 12%). It did, however, predict a short-term “moderation in demand” in the theme parks due to a softening consumer environment. Shares fell nearly 5%.

Novo Nordisk

Weaker sales of Novo Nordisk’s weight-loss drug Wegovy in Q3 sent its shares down 8%. This is a rare miss from a company that has seen its shares put on more than 200% since the launch of Wegovy in June 2021 amid a series of profit beats. This has caused investors to worry about competition from Eli Lilly, which reports tomorrow. Overall sales guidance was raised by 2% due to improving GLP-1 Rx trends. Volume trends are improving, which suggests the negative reaction overnight may be short-lived.

Shopify

Shopify beat Q2 EPS expectations by 27% as its AI-enabled tools brought more merchants onto its e-commerce platform. Some of the new brands using Shopify include Toys "R" Us, Mas+ by Lionel Messi and Dios Mio Coffee by Sofia Vergara. Sales were 2% higher than forecast, but good cost discipline magnified the beat at the bottom line. Shares rose 18%, reversing the negative trend since it issued downbeat sales forecasts after its Q4 2023 and Q1 2024 results. The implied outlook for Q3 2024 is 25% higher than consensus.

Occidental Petroleum

Higher oil production in Colorado and higher realised crude prices underpinned a significant profit beat in Q2, with EPS coming in 33% above consensus. Output in the U.S. Permian basin and in the Gulf of Mexico was at the higher end of the company's guidance. Q3 production is expected to increase about 140,000 boepd to 1.390m boepd. The recent acquisition of CrownRock has strengthened Occidental's position in the Permian basin.

The story so far

With nearly all companies now having reported, the median EPS beat is 4.2% and the median EPS growth 9.5%. The top share price reactions have been to Shopify, Spotify and Uber. The most negative have been to Intel, Snap and Ford.

It was a rough night for Airbnb, with shares falling 15% after the bell on a reduction to Q3 guidance, citing a shortening of booking windows around the world. Uber Technologies did the opposite, its shares rising 11% after beating consensus, notably in Delivery margins. Caterpillar achieved an unexpected improvement in margins with steady growth in the US (but weakness in global markets, notably China). Amgen reported earnings in line with expectations, with higher costs offsetting the additional revenue from the acquisition of Horizon. Global Business Travel Group (AMEX) beat forecasts as international corporate travel demand recovers, sending its shares up 17%.

Tonight, we’re watching out for results from Walt Disney, Shopify and Occidental Petroleum.

Amgen

Biotechnology company Amgen’s Q2 EPS fell by 0.6%, largely in line with analyst expectations. This was due to higher expenses, including costs related to development of the experimental obesity drug MariTide, offset a 20% increase in revenue driven by the acquisition in October of rare disease drugmaker Horizon Therapeutics. Shares fell 2% in afterhours trading.

Caterpillar

Caterpillar beat analyst EPS expectations by 8% as higher prices and lower manufacturing costs offset the effects of reduced demand for heavy equipment in key markets outside the US, especially in China but also in Europe. North American sales were up 1%, buoyed by infrastructure investment arising from the Federal Government’s spectacularly misnamed Inflation Reduction Act. Caterpillar increased its full year EPS guidance on the strength of its improved margins. Shares rose 3%.

Uber Technologies

Uber performed well in Q2 with gross bookings up 21% and 1% above consensus; EBITDA up 71% and 4% above consensus; and EPS up 161% and 53% above consensus. Demand trends were stable in Mobility with sales slightly above expectations. Delivery saw steady growth in sales, but 1% below the street, although its profits were higher than forecast. Q3 guidance was in line with current analyst estimates for both bookings and EBITDA.

Airbnb

Airbnb guided to Q3 revenue below analyst expectations, indicating booking windows are shortening around the world, which suggests consumers are leaving it to the last minute to book holidays amid economic uncertainty. This echoes similar comments made by Booking (BKNG.NAS) in July. Airbnb’s Q2 EPS was down 12% and 6% below analyst forecasts. The average cost per night rose 2% to $169.53. Shares fell 15% in afterhours trading.

Global Business Travel Group

A recovery in global travel demand saw EBITDA rise 20%, above analyst expectations and company guidance. The EBITDA margin rose from 18% to 20% driven by lower administrative costs and productivity improvements relating to the use of AI. Transaction growth was 3.8% yoy, with a slowdown in Q2, partly because of the Paris Olympics. Full year guidance was reiterated.

The story so far

76% of results in and the median EPS beat has firmed to +4.1%. The median yoy EPS growth is 9.2%. Most positive share price reactions have been to Global Business Travel Group, Spotify, PayPal and Bristol-Myers Squibb. The most negative have been to Intel, Snap, Ford and Domino’s Pizza.

Investment Watch is a quarterly publication produced by Morgans that delves into key insights for equity and economic strategy. This latest publication will cover;

• Asset Allocation – not the time to play defence
• Economic Strategy – averting a world recession
• Equity Strategy – attention turns to August
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• Banks – befuddling
• Updated Morgans Best Ideas

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We think the investment landscape remains favourable. The US economic fundamentals are strong with no significant downside risks to growth in the near-term. European leading indicators suggest a turning point is near and China’s cyclical recovery is still gaining momentum after bottoming earlier in the year.

Meanwhile, the Australian economy continues to defy expectations of a sharper slowdown. In our view, this is not the time to play defence and continue to expect growth assets such as equities and property to do well. This quarter, we look at tactical opportunities in private credit, global equities and across the Australian equity market (resources, agriculture, travel and technology).

As interest rates normalise, earnings quality, market positioning and balance sheet strength will play an important role in distinguishing companies from their peers. We think stocks will continue to diverge in performance at the market and sector level, and investors need to take a more active approach than usual to manage portfolios.

Additions: This month we add Elders.

July best ideas

Elders (ELD)

Small cap | Food/Ag

ELD is one of Australia’s leading agribusinesses. It has an iconic brand, 185 years of history and a national distribution network throughout Australia. With the outlook for FY25 looking more positive and many growth projects in place to drive strong earnings growth over the next few years, ELD is a key pick for us. It is also trading on undemanding multiples and offers an attractive dividend yield.

Technology One (TNE)

Small cap | Technology

TNE is an Enterprise Resource Planning (aka Accounting) company. It’s one of the highest quality companies on the ASX with an impressive ROE, nearly $200m of net cash and a 30-year history of growing its earnings by ~15% and its dividend ~10% per annum. As a result of its impeccable track record TNE trades on high PE. With earnings growth looking likely to accelerate towards 20% pa, we think TNE’s trading multiple is likely to expand from here.

ALS Limited

Small cap | Industrials

ALQ is the dominant global leader in geochemistry testing (>50% market share), which is highly cash generative and has little chance of being competed away. Looking forward, ALQ looks poised to benefit from margin recovery in Life Sciences, as well as a cyclical volume recovery in Commodities (exploration). Timing around the latter is less certain, though our analysis suggests this may not be too far away (3-12 months). All the while, gold and copper prices - the key lead indicators for exploration - are gathering pace.

Clearview Wealth

Small cap | Financial Services

CVW is a challenger brand in the Australian retail life insurance market (market size = ~A$10bn of in-force premiums). CVW sees its key points of differentiation as its: 1) reliable/trusted brand; 2) operational excellence (in product development, underwriting and claims management); and 3) diversified distributing network. CVW's significant multiyear Business Transformation Program has, in our view, shown clear signs of driving improved growth and profitability in recent years. We expect further benefits to flow from this program in the near term, and we see CVW's FY26 key business targets as achievable. With a robust balance sheet, and with our expectations for ~21% EPS CAGR over the next three years, we see CVW's current ~11x FY25F PE multiple as undemanding.

GUD Holdings

Large cap | Consumer Discretionary

GUD is a high-quality business with an entrenched market position in its core operations and deep growth opportunities in new markets. We view GUD’s investment case as compelling, a robust earnings base of predominantly non-discretionary products, structural industry tailwinds supporting organic growth and ongoing accretive M&A optionality. We view the ~12x multiple as undemanding given the resilient earnings and long-duration growth outlook for the business ahead.

Stanmore Resources

Small cap | Metals & Mining

SMR’s assets offer long-life cashflow leverage at solid margins to the resilient outlook for steelmaking coal prices. We’re strong believers that physical coal markets will see future cycles of “super-pricing” well above consensus expectations, supporting further periods of elevated cash flows and shareholder returns. We like SMR’s ability to pay sustainable dividends and its inventory of organic growth options into the medium term, with meaningful synergies, and which look under-recognised by the market. We see SMR as the default ASX-listed producer for pure met coal exposure. We maintain an Add and see compelling value with SMR trading at less than 0.8x P/NPV.

Morgans clients receive full access of the Best Ideas, including our large, mid and small-cap key stock picks.

There are many reasons to invest in equities. Historically, they have offered higher capital returns than many other asset classes. Furthermore, they provide liquidity and diversification and allow investors to participate in the growth of high performing businesses and sectors. Not to be overlooked, however, is their capacity to provide an income stream through regular dividends. In the Month Ahead for July, we highlight a selection of Australian equities that offer superior forecast dividend yields and may be suitable investments for those seeking income.

Happy New Financial Year!

BHP Group (BHP)

BHP Group (ASX: BHP) is the largest diversified mining company in the world. BHP has extensive iron ore, copper, nickel and coal operations, and will soon add potash to its portfolio once its massive Jansen project comes online in late 2026. Besides nickel, which has proven volatile, the rest of BHP’s basket of market exposures share the similar characteristic of typically boasting bumper margins throughout the cycle. Over the last decade BHP has shifted its corporate strategy toward streamlining its business, protecting its balance sheet, slowing its pace of investment and maximising shareholder returns. Despite an impressive shareholder performance over recent years, BHP’s dividend yield has remained above market.

Dalrymple Bay Infrastructure (DBI)

Dalrymple Bay Infrastructure (ASX: DBI). DBI owns a fully contracted coal export terminal in central Qld. It has strong revenue and cost risk mitigants, CPI-linked base revenues boosted by incremental revenues from commissioned sustaining capex projects, very high EBITDA margins, and an investment grade credit profile. Investors comfortable with the coal-related exposure also benefit from the ESG discount imputed into the stock price.

Ventia Services Group (VNT)

Ventia Services Group (ASX: VNT) delivers essential services predominantly to government (c.75% of revenue), with an average contract tenure of c.5-7 years and direct inflation passthrough (95% of revenue) in most contracts. The industry grows at 6-7% pa, with VNT growing 7-10% through industry growth and contract expansion, whilst margins should remain stable. The stock continues to deliver a strong dividend yield, which we expect to continue growing at mid-single digits, whilst trading on an undemanding low double-digit PER.

Eagers Automotive (APE)

Eagers Automotive Limited (ASX: APE) is the leading automotive retail group in Australia and New Zealand, operating for over 100 years and representing a diverse portfolio of OEM (original equipment manufacturer) brands. While current industry dynamics in the auto sector (margin pressure; cost of living impacts) are expected to persist in the near-term, we view the scale operators (such as APE) as best placed to navigate this challenging dynamic. Longer-term, we are positive on APE’s various strategic initiatives and expect it can continue to scale; and sustain a structurally higher return on sales through the cycle.

GQG Partners (GQG)

GQG Partners (ASX: GQG) is global asset management boutique, managing ~US$150bn in funds across four primary equity strategies. We like GQG given its highly effective distribution, scalable strategies, and strong long-term investment performance. We view the earnings tailwind from strong funds under management growth (a combination of investment performance and net fund inflows) will continue and we think GQG will continue to re-rate along with this to a higher earnings multiple in time.

HomeCo Daily Needs REIT (HDN)

HomeCo Daily Needs REIT (ASX: HDN) has a +$4.5bn real estate portfolio focused on daily needs retail (Large Format Retail; Neighbourhood; and Health Services) across +50 properties with the top five tenants being Woolworths, Coles, JB Hi-Fi, Bunnings and Spotlight. Most of leases are fixed. The portfolio has resilient cashflows, with the majority of tenants being national. Sites are in strategic locations with strong population growth. HDN offers an attractive distribution yield, with a +$600m development pipeline providing further growth.

IPH Limited (IPH)

IPH Limited (ASX: IPH) is a prominent IP services group with market leading shares in Australia, Singapore and Canada. A defensive business, IPH has strong cash flow generation (with high conversion to EBITDA) and a long-track record of paying dividends to shareholders. We like IPH and consider the return to organic growth (albeit subdued) as a key near-term catalyst for the group. Longer-term, we expect IPH to continue to prosecute its consolidation and network expansion strategy offshore.

Suncorp (SUN)

Suncorp (ASX: SUN) is well positioned to benefit from continued strong price increases going through the home and motor insurance market in Australia, we expect these price increases to be supportive of SUN’s margins expanding further over the next couple of years. Additionally SUN’s recent divestment of its bank was done at an excellent price and will allow the company to focus completely on its strongest business, general insurance, where it is a market leader.  Finally, post the bank sale, SUN now has >A$4bn of excess capital to return to shareholders, which will occur most likely via the way of a share consolidation and a small special dividend.

Super Retail Group (SUL)

Super Retail Group (ASX: SUL) is a large discretionary retailer comprising four well-known brands which span several categories, including: Supercheap Auto; rebel Sport; Boating, Camping and Fishing (BCF), and Macpac. We like SUL given its market leading scale (>740 stores), deep data capabilities, strong loyalty base and diversified portfolio of brands. SUL has a very strong net cash balance sheet, and we expect it is positioned for further capital management initiatives in the near-term (i.e. potential special dividends).

Woodside Energy (WDS)

Woodside Energy (ASX: WDS) is the largest ASX-listed oil and gas producer, and in the top 10 globally. While its share price has come under pressure, Woodside’s fundamentals have benefited from resilient oil/LNG prices, steady group production, progress on delivering its key growth projects, a robust level of profitability, and clear focus on its dividend profile. Woodside’s dividend payout ratio has averaged 80% of earnings for the last +5 years, which is impressive given the last 2 years have been a capex-heavy phase as its progressed construction of the Scarborough, Pluto Train 2, and Sangomar projects. With gearing remaining low and cash flow set to grow post the current investment phase, we see Woodside as likely to remain an attractive yield play.

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Morgans’ Your Wealth publication is our half yearly scrutiny into current affairs for wealth management. Our latest Issue 27 is out now.

This latest publication will cover understanding the benefits of a CarePlus annuity for aged care, the proposed Div296 tax, averting a world recession, super and tax next financial year and expectations on how illiquid assets in SMSFs are valued.

Download your copy today to receive the latest insights.

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Morgans has reviewed a number of these innovative products, the details of which are summarised in the latest publication of Your Wealth.