The Skies Won't Clear Up for Some Stocks to Fly

Michael Msika
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The Skies Won't Clear Up for Some Stocks to Fly

(Bloomberg) -- In a European market up about 14% this year, only three sectors have completely missed out: telecoms, travel & leisure and banks. Among those laggards, airlines have been hit particularly hard. The shooting-down of a U.S. drone by Iran last week dealt another blow to an industry already facing too many challenges.After a very poor performance in 2018, airlines are getting no respite. They’re being hammered by a combo of a price war, high fuel costs on average, trade tensions and slower global growth. Several companies have issued profit warnings this year, including Ryanair and Lufthansa, while tensions in Iran have already pushed some airlines to divert flights.The pain isn’t over according to HSBC analysts, who anticipate “many” more profit warnings within the industry on weakening demand trends. Looking at individual performances, Wizz Air has been a real winner. Its recipe for success: exposure to faster growing central and eastern European markets. At the other end of the scope, Norwegian Air has been particularly affected by the grounding of its Boeing fleet and failed merger talks with IAG.Despite multiple downgrades, the consensus still sees upside for most stocks. The sector hasn’t been under particular attack from short sellers. Air France-KLM is the only company with a high short interest level, while EasyJet also stands out with a recent surge.Yet, the downside risks remain high. Cargo freight is highly sensitive to global growth, while trade tensions and protectionism also go against the sector. Strikes are another problem, particularly for Lufthansa with industrial action on the cards for July.The challenges always seem to be bigger in Europe. Compared to their American or Asian peers, the underperformance of European airlines is striking. Overall, the airline association IATA sees a combination of rising costs and slowing demand squeezing profits, but the region is further burdened by regulatory costs and higher competition, they say. It’s also the most exposed region to international trade.Fuel accounts for 25% of operating costs, according to the IATA, which means crude price swings have a major impact on airlines’ results. Citigroup strategists expect crude to hit $75 this summer while positioning is close to a historical low.There isn’t much to hope for. A potential return to synchronized global growth, spurred by a weaker dollar and dovish central bank policies, could extend the cycle and become a catalyst for airlines in the medium term. As for the short term, all eyes will be on the Trump-Xi meeting ahead of the G-20 this week. Fewer barriers and more trade is all the sector needs.In the meantime, Euro Stoxx 50 futures are trading up 0.1% ahead of the open.SECTORS IN FOCUS TODAY:Watch carmakers and parts suppliers after Germany’s Daimler cut its profit forecast for the third time in a year. Watch Volkswagen, BMW, Daimler and Peugeot for any reaction to the warning, along with auto suppliers like Michelin and Continental.Watch oil and airline stocks after U.S. President Donald Trump warned of further sanctions on Iran, days after the U.S. called off an air strike at the eleventh hour after Iran shot down an unmanned U.S. drone.Watch semiconductors after the U.S. added five more Chinese tech entities to a trade blacklist just days ahead of a planned summit between U.S. President Donald Trump and Chinese leader Xi Jinping.Watch Turkey-exposed stocks after the opposition party won a redo of the Istanbul mayoral election in a landslide on Sunday. Watch banks including UniCredit, BBVA, BNP Paribas, as well as Aeroports de Paris, Vicat, Telia, DFDS among others.COMMENT:“Eurozone stocks are more vulnerable in an environment of heightened uncertainty over global trade and weaker global growth, which has weakened demand for investment goods,” writes UBS Wealth Management CIO Mark Haefele in a note. “Consensus estimates for the euro-zone’s GDP growth rate for the remainder of 2019 are significantly lower than those for the U.S. The Fed has more ammunition than the ECB to combat slowing growth should trade tensions escalate.” COMPANY NEWS AND M&A:Daimler Issues Third Profit Warning in a Year as Risks MountMetro Says Kretinsky’s $6.6 Billion Bid Undervalues Retailer Carrefour Sells Control of China Business at a DiscountLufthansa Changes Dividend Policy to 20%-40% of Adjusted NetFed Officials Ask Deutsche Bank to Explain ‘Bad Bank’ Plans: FTGermany Sought UniCredit Interest in Commerzbank Stake: PassauerNatixis Supports H2O Measures, Brings Forward AuditAlstom Presents 2023 Targets, Sees Adj. Ebit Margin of About 9%Airbus Plans to Shut Down Subsidiary Under Bribery InvestigationVoltalia Announces Capital Increase of Around EU376mBeiersdorf Planning New Acquisitions, Boersen-Zeitung ReportsRussia’s Evraz Eyes British Steel Business in France, FT ReportsEurofins Says Cyber Attack May Have Material ImpactSGS Sells Petroleum Services Corp to Aurora Capital for $335mDuni CEO Says 5% Organic Growth Target Is More Feasible Now: DINOTES FROM THE SELL SIDE:Entertainment One gets a new buy rating and price target of 475p from Berenberg, which says revenue from structural growth activities now surpasses income from the disrupted (DVD/CD producers, cinemas).Carrefour’s agreement to sell a majority stake in its China business is 3% to 4% accretive and allows the French retailer to focus more strongly on its highly competitive domestic market, an analyst at Bernstein wrote in a note.Melrose provides a unique opportunity to invest in a FTSE 100 co. that has a consistent record as an industrials turnaround specialist, Citi says in note as initiates at buy with 220p PT.Julius Baer has the most levers to drive growth among the Swiss banks with scope to re-rate on capital management, cost control and volume growth, RBC says, upgrading to outperform.TECHNICAL OUTLOOK for Stoxx 600 index:Resistance at 392.7 (July 2018 high); 397.9 (May 2018 high)Support at 381.6 (50-DMA); 374.5 (61.8% Fibo)RSI: 60.1TECHNICAL OUTLOOK for Euro Stoxx 50 index:Resistance at 3,514 (May high); 3,596 (May 2018 high)Support at 3,410 (50-DMA); 3,403 (61.8% Fibo)RSI: 64.1MAIN RESEARCH AND RATING CHANGES:UPGRADES:Admiral upgraded to overweight at Barclays; PT 23 PoundsJulius Baer upgraded to outperform at RBC; PT 57 FrancsMetro AG Raised to Market Perform at Bernstein; PT 16 EurosDOWNGRADES:Nanoco downgraded to hold at Jefferies; PT 9 PenceNatixis downgraded to neutral at JPMorgan; PT 3.90 EurosRWE downgraded to reduce at HSBC; Price Target 21 EurosTod’s downgraded to underperform at Credit Suisse; PT 32 EurosINITIATIONS:Entertainment One rated new buy at Berenberg; PT 4.75 PoundsMelrose Industries rated new buy at Citi; PT 2.20 PoundsRecipharm rated new hold at Jefferies; PT 117 KronorUrban Exposure rated new buy at Jefferies; PT 90 PenceMARKETS:MSCI Asia Pacific down 0.6%, Nikkei 225 up 0.1% S&P 500 down 0.1%, Dow down 0.1%, Nasdaq down 0.2%Euro up 0.1% at $1.138Dollar Index down 0.07% at 96.16Yen down 0.11% at 107.44Brent up 0.4% at $65.5/bbl, WTI up 0.7% to $57.8/bblLME 3m Copper down 0.1% at $5966/MTGold spot up 0.4% at $1404.6/ozUS 10Yr yield down 1bps at 2.05% ECONOMIC DATA (All times CET):10am: (GE) June IFO Business Climate, est. 97.4, prior 97.910am: (GE) June IFO Expectations, est. 94.6, prior 95.310am: (GE) June IFO Current Assessment, est. 100.3, prior 100.6* For a daily wrap on developments in European equity capital markets, click hereTo contact the reporter on this story: Michael Msika in London at mmsika4@bloomberg.netTo contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Jon MenonFor more articles like this, please visit us at bloomberg.com©2019 Bloomberg L.P.

(Bloomberg) -- In a European market up about 14% this year, only three sectors have completely missed out: telecoms, travel & leisure and banks. Among those laggards, airlines have been hit particularly hard. The shooting-down of a U.S. drone by Iran last week dealt another blow to an industry already facing too many challenges.

After a very poor performance in 2018, airlines are getting no respite. They’re being hammered by a combo of a price war, high fuel costs on average, trade tensions and slower global growth. Several companies have issued profit warnings this year, including Ryanair and Lufthansa, while tensions in Iran have already pushed some airlines to divert flights.

The pain isn’t over according to HSBC analysts, who anticipate “many” more profit warnings within the industry on weakening demand trends. Looking at individual performances, Wizz Air has been a real winner. Its recipe for success: exposure to faster growing central and eastern European markets. At the other end of the scope, Norwegian Air has been particularly affected by the grounding of its Boeing fleet and failed merger talks with IAG.

Despite multiple downgrades, the consensus still sees upside for most stocks. The sector hasn’t been under particular attack from short sellers. Air France-KLM is the only company with a high short interest level, while EasyJet also stands out with a recent surge.

Yet, the downside risks remain high. Cargo freight is highly sensitive to global growth, while trade tensions and protectionism also go against the sector. Strikes are another problem, particularly for Lufthansa with industrial action on the cards for July.

The challenges always seem to be bigger in Europe. Compared to their American or Asian peers, the underperformance of European airlines is striking. Overall, the airline association IATA sees a combination of rising costs and slowing demand squeezing profits, but the region is further burdened by regulatory costs and higher competition, they say. It’s also the most exposed region to international trade.

Fuel accounts for 25% of operating costs, according to the IATA, which means crude price swings have a major impact on airlines’ results. Citigroup strategists expect crude to hit $75 this summer while positioning is close to a historical low.

There isn’t much to hope for. A potential return to synchronized global growth, spurred by a weaker dollar and dovish central bank policies, could extend the cycle and become a catalyst for airlines in the medium term. As for the short term, all eyes will be on the Trump-Xi meeting ahead of the G-20 this week. Fewer barriers and more trade is all the sector needs.

In the meantime, Euro Stoxx 50 futures are trading up 0.1% ahead of the open.

SECTORS IN FOCUS TODAY:

Watch carmakers and parts suppliers after Germany’s Daimler cut its profit forecast for the third time in a year. Watch Volkswagen, BMW, Daimler and Peugeot for any reaction to the warning, along with auto suppliers like Michelin and Continental.Watch oil and airline stocks after U.S. President Donald Trump warned of further sanctions on Iran, days after the U.S. called off an air strike at the eleventh hour after Iran shot down an unmanned U.S. drone.Watch semiconductors after the U.S. added five more Chinese tech entities to a trade blacklist just days ahead of a planned summit between U.S. President Donald Trump and Chinese leader Xi Jinping.Watch Turkey-exposed stocks after the opposition party won a redo of the Istanbul mayoral election in a landslide on Sunday. Watch banks including UniCredit, BBVA, BNP Paribas, as well as Aeroports de Paris, Vicat, Telia, DFDS among others.

COMMENT:

“Eurozone stocks are more vulnerable in an environment of heightened uncertainty over global trade and weaker global growth, which has weakened demand for investment goods,” writes UBS Wealth Management CIO Mark Haefele in a note. “Consensus estimates for the euro-zone’s GDP growth rate for the remainder of 2019 are significantly lower than those for the U.S. The Fed has more ammunition than the ECB to combat slowing growth should trade tensions escalate.”

COMPANY NEWS AND M&A:

Daimler Issues Third Profit Warning in a Year as Risks MountMetro Says Kretinsky’s $6.6 Billion Bid Undervalues Retailer Carrefour Sells Control of China Business at a DiscountLufthansa Changes Dividend Policy to 20%-40% of Adjusted NetFed Officials Ask Deutsche Bank to Explain ‘Bad Bank’ Plans: FTGermany Sought UniCredit Interest in Commerzbank Stake: PassauerNatixis Supports H2O Measures, Brings Forward AuditAlstom Presents 2023 Targets, Sees Adj. Ebit Margin of About 9%Airbus Plans to Shut Down Subsidiary Under Bribery InvestigationVoltalia Announces Capital Increase of Around EU376mBeiersdorf Planning New Acquisitions, Boersen-Zeitung ReportsRussia’s Evraz Eyes British Steel Business in France, FT ReportsEurofins Says Cyber Attack May Have Material ImpactSGS Sells Petroleum Services Corp to Aurora Capital for $335mDuni CEO Says 5% Organic Growth Target Is More Feasible Now: DI

NOTES FROM THE SELL SIDE:

Entertainment One gets a new buy rating and price target of 475p from Berenberg, which says revenue from structural growth activities now surpasses income from the disrupted (DVD/CD producers, cinemas).Carrefour’s agreement to sell a majority stake in its China business is 3% to 4% accretive and allows the French retailer to focus more strongly on its highly competitive domestic market, an analyst at Bernstein wrote in a note.Melrose provides a unique opportunity to invest in a FTSE 100 co. that has a consistent record as an industrials turnaround specialist, Citi says in note as initiates at buy with 220p PT.Julius Baer has the most levers to drive growth among the Swiss banks with scope to re-rate on capital management, cost control and volume growth, RBC says, upgrading to outperform.

TECHNICAL OUTLOOK for Stoxx 600 index:

Resistance at 392.7 (July 2018 high); 397.9 (May 2018 high)Support at 381.6 (50-DMA); 374.5 (61.8% Fibo)RSI: 60.1

TECHNICAL OUTLOOK for Euro Stoxx 50 index:

Resistance at 3,514 (May high); 3,596 (May 2018 high)Support at 3,410 (50-DMA); 3,403 (61.8% Fibo)RSI: 64.1

MAIN RESEARCH AND RATING CHANGES:UPGRADES:

Admiral upgraded to overweight at Barclays; PT 23 PoundsJulius Baer upgraded to outperform at RBC; PT 57 FrancsMetro AG Raised to Market Perform at Bernstein; PT 16 Euros

DOWNGRADES:

Nanoco downgraded to hold at Jefferies; PT 9 PenceNatixis downgraded to neutral at JPMorgan; PT 3.90 EurosRWE downgraded to reduce at HSBC; Price Target 21 EurosTod’s downgraded to underperform at Credit Suisse; PT 32 Euros

INITIATIONS:

Entertainment One rated new buy at Berenberg; PT 4.75 PoundsMelrose Industries rated new buy at Citi; PT 2.20 PoundsRecipharm rated new hold at Jefferies; PT 117 KronorUrban Exposure rated new buy at Jefferies; PT 90 Pence

MARKETS:

MSCI Asia Pacific down 0.6%, Nikkei 225 up 0.1% S&P 500 down 0.1%, Dow down 0.1%, Nasdaq down 0.2%Euro up 0.1% at $1.138Dollar Index down 0.07% at 96.16Yen down 0.11% at 107.44Brent up 0.4% at $65.5/bbl, WTI up 0.7% to $57.8/bblLME 3m Copper down 0.1% at $5966/MTGold spot up 0.4% at $1404.6/ozUS 10Yr yield down 1bps at 2.05%

ECONOMIC DATA (All times CET):

10am: (GE) June IFO Business Climate, est. 97.4, prior 97.910am: (GE) June IFO Expectations, est. 94.6, prior 95.310am: (GE) June IFO Current Assessment, est. 100.3, prior 100.6

* For a daily wrap on developments in European equity capital markets, click here

To contact the reporter on this story: Michael Msika in London at mmsika4@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Jon Menon

For more articles like this, please visit us at bloomberg.com

©2019 Bloomberg L.P.