Tag Archives: UK Budget

(Bearish) Letter from America

Brexit continues to make the headlines even in the US. Many key US corporations reported earnings yesterday and some, who offer a readacross to UK names, were pretty disappointing. The most important in my view was that of the world’s largest manufacturer of appliances, Whirlpool, who announced a pretty bad quarter and the stock was down 11%. Q3 EPS fell 5% short of analysts’ expectations but more importantly the company provided a pretty cautious outlook. Now why do I bother writing about it? Well it reinforces my view that the UK consumer should brace for some pretty challenging Christmas ahead (see http://hereticinvestor.com/is-christmas-coming-this-year/)

Why do I say so?

Well Whirpool’s management says so. The weakness in Q3 (July-September) was due to “temporary U.S. demand softness as well as Brexit-related currency volatility and demand weakness in the U.K.” Brexit makes the headlines already in the US corporations’ releases with severe effects on share prices. It is important to keep an eye on what the manufacturers say because there is a big readacross for the retailers who sell their stuff. It is the first actual tangible warning about demand the way I see. Whirpool’s sales in Europe, Middle East and Africa were down 13% in Q3 (-6% ex FX) and ongoing profits down 32%! These are some big moves!! EMEA is c25% of Whirpool’s sales. I am not sure how big the UK is for them but the fact that it features as one of the two main reasons, which resulted to the company profit warning, makes it serious.

Implications about the housing market and the wider UK economy

I don’t want to read too much from one company’s results but if demand for appliances is so negative then it means that the housing market is not at its best. If the housing market, a major constituent of the British consumers’ wealth, is getting softer then the implications about the wider consumer demand are pretty grim. I can’t quantify that at the moment but sense check that. Because of Whirlpool’s weakness yesterday (together with Sherwin-Williams, a paint manufacturer, whose shares were also down 11% on the day), Home Depot and Lowes, the two biggest DIY companies in the US were down 3.5%. It will be interesting to see what the two companies actually report on the 15th and 16th of November (Q3). Home Depot is used as a yardstick for investors’ sentiment on Kingfisher here in the UK so weakness there may easily negatively impact Kingfisher here albeit with a lag.

Do Sprint and Apple results matter for Dixons Carphone?

Sprint was another name that reported results yesterday and the stock fell 6%. I believe this is more “travel and arrive” though as the stock is up 80% YTD with Sprint actually raising guidance substantially expecting EBIT of $1.2-1.7bn vs. $1-1.5bn before. Dixons Carphone has a deal with Sprint to operate 500 new Sprint stores, which can actually be very profitable in the next 3 years if indications about Sprint’s profitability continue to be positive. One bad thing though was that Sprint’s net additions of postpaid subscribers were 344k, versus estimates of 403k new customers. Dixons Carphone will need to help Sprint reverse that with their valuable “Know How” (as they did with Best Buy mobile), otherwise profitability may eventually struggle.

The news on Apple are mixed. Apple sold 46.5 million iPhones in the quarter ending September. That’s better than analysts’ expectations for 44.6 million iPhones but still 3% down y/y. iPhone 7 participated only in the last two weeks of the quarter so it is early to assess its success, which is important for Carphone, but nonetheless iPhones do seem to struggle (despite Samsung’s phones exploding…)

Conclusion/My view

As I said in my post about Christmas in the UK I find the upcoming festive season to be challenging from a UK consumer’s demand perspective and I still expect UK retailers’ shares to touch their post Brexit lows. We are not yet at the point of maximum pain. Big tickets will suffer the most. I am very surprised how well Kingfisher’s shares hold up vs. most other UK retailers!

In anticipation of the Chancellor of the Exchequer’s  November budget…

I believe there is no way Mr Hammond will not announce fiscal stimulus although I am not an economist. We can debate what the Budget may look like at a slightly later stage (we still have a month ahead of us) as this can be another catalyst for consumer names but till then the news is not bright…

Author: Chris Chaviaras

Disclaimer: The author doesn’t hold any shares of the aforementioned companies