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  • S&P 500 EPS seen just higher in Q4
  • Valuations are stretched after 2019’s multiple expansion
  • Tesla & Apple are top stocks to watch this earnings season

It’s easy to miss it, but US earnings season gets underway next week as the big banks begin reporting on Jan 14th. Weak corporate earnings growth could dent optimism around US stocks, but with the fourth quarter of 2019 out of the way, the market’s real focus is going to be whether we get the 10% earnings growth forecast in 2020.  

Consensus estimates indicate a 1-2% decline in Q4 earnings, but the tendency to beat expectations suggests we will see earnings growth, albeit small.  

Last year we saw multiple expansion massively outweigh earnings growth as the driver of the 28% rise in the S&P 500 last year. This poses problems as it means valuations are already rather stretched and reliant on strong EPS growth in 2020. The S&P 500 forward PE has jumped to 19 from a start of about 14 at the beginning of 2019, having averaged 16-17 over the last five years. Remember though that the starting point of the year was exceptionally weak given the Christmas 2018 drubbing. From the 2018 high through the recent all-time highs, the S&P 500 has only risen by a more modest 10%. 

Two top stocks to watch this earnings season 

Tesla – The stock has enjoyed a remarkable run up to record highs at $472 as the company turned a profit in Q3, reported a surge in deliveries and sent investors into a frenzy with its Shanghai plant and promise of electric growth in China. That and a huge amount of short covering.

Shorts have been crushed. A surprise profit in the third quarter has been the catalyst while we have seen remarkable progress in China and with the Model Y. Last week Tesla said it delivered 367,500 vehicles last year – double that recorded in 2018. It was above the forecast of at least 360,000 offered in Oct, but still at the low end of the expectations for 360,000-400,000 forecast at the start of the year. Investors seem to be shrugging off the fact that growth in 2019 was below the run rate seen in H2 2018 as it ramped production to beat a cut-off for US tax credits. 

In Q3 Tesla made $143m against a loss of $1.1bn in the first half. And revenues came in at $6.3bn, down from $6.8bn a year ago and short of the $6.5bn expected. Deliveries had reached a record in the quarter but fell a little short of expectations.  

We suggested in October when the Q3 numbers were released that this could be the turning point for this battered stock. After spending big to get the Model 3 out the door it’s managed to cut costs by 16% and has cash on hand of $5.3bn. The company expects the higher margin Model Y will vastly outsell all other models ‘combined’. 

That cash pile will be needed though as Tesla also plans to create a new ‘gigafactory’ in Europe and invest in rolling out its new Semi heavy duty electric truck. 

The usual concerns remain – cost control, production capacity and the fact that despite being very firmly in the growth category vehicle deliveries remain a problem. The breakneck speed of production in H2 18 seems to be a high watermark. Moreover, like a number of companies that have attracted great attention but have yet to consistently make a profit, Tesla has not had to contend with a recession yet. 

The Analyst Recommendation tool on the platform indicates the Street remains split – analysts still don’t agree on this one.

Apple – The fiscal first quarter is always Apple’s strongest as it chalks up the holiday season and new iPhone models. We’ve had decent indications from the Services side of the business indicating that its pivot to being more of a Services business is in full swing. App store customers spent a record $1.42bn between Christmas and New Year, 16% up on last year, the company has said. Management also revealed that Apple News is drawing over 100m monthly active users across the US, UK, Canada and Australia. This is all to the good – Services margins are about double that for the rest of the business and will mean re-rating of the stock going forward. 

The stock has run up quite a head of steam to hit $300. We’ve seen a potential topping pattern on the chart as it fails to make new highs and the 14-day RSI indicating overbought conditions. MACD could also be turning. Moreover, on a trailling 12-month (TTM) basis Apple’s PE has soared to 25 from around 11 last year. Upside potential may therefore be limited. A lot depends still on iPhone sales. 

Our analyst recommendations tool highlights that while the broad consensus on the Street is positive, the average price target indicates the stock may have topped out, temporarily at least.

One thinks that the Street is just playing catch up and will rerate, although it’s fair to say that Apple stock is relatively expensive vs its historic average. 

Apple posted record Q4 revenues despite slower iPhone sales and guided for a very strong holiday quarter. Earnings per share beat handsomely at $3.03 vs $2.84 expected and up 4% year on year. Revenues jumped 2% to $64bn.  

iPhone sales matter a lot less… 

The improvement on both top and bottom line in the fiscal fourth quarter came despite a 9% drop in iPhone sales. Whilst that’s not as bad as the 15% type level seen recently, it shows how much of the lifting is now being done by other parts of the business. It suggests Apple is reaching an inflection point where it’s no longer dependent on the iPhone for EPS growth. This is across the board a positive. Indeed for 2019 as a whole, iPhone sales fell 14% but the stock was up 89%. 

…because Services and Wearables are roaring ahead 

Wearables, Home and Accessories knocked it out the park, with sales up 54% to $6.52bn. This was by far the fastest growing segment and will account for an increasing percentage of sales, currently c10%. 

Services growth remains good at 18%. Stripping out certain one-off items that knocked the Q3 number, this represents consistent sequential growth from the last quarter. Whilst still very positive, it’s a comedown from the +20% levels seen in preceding quarters. But with a clutch of new services rolling out, not least Apple TV+, a renewal of past growth rates is on the cards. Higher margin, recurring Services revenues are a key reason why multiple expansion may be maintained. 

American consumers are in good shape 

The US consumer remains strong. Almost all the growth came from the Americas, which is dominated by US sales. American consumers still look in good shape. Sales in Europe, Japan and Greater China fell. 

Holiday quarter could be record breaking 

Guidance for the fiscal first quarter is bullish, and Apple could mark a record for quarterly revenues. Apple is guiding revenue of between $85.5 billion and $89.5 billion. Early indicators suggest the iPhone11 is performing well with consumers. Favourable comparisons in China from last year are assured, given the previous year’s downswing in iPhone sales in the region.  

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