4 Highlights from Earnings Season

From Shell's shock dividend cut to Tesla's Morningstar upgrade, the latest earnings season was full of surprises - not least that Warren Buffett is not buying in the current climate

James Gard 4 May, 2020 | 10:26AM
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Warren Buffett

This earnings season has been more closely watched than ever by investors as it revealed how many of the world’s biggest firms fared during the coronavirus outbreak – and crucially, what they expect to happen next.

Many companies are refusing to make forecasts for the rest of the financial year because of uncertainty over when lockdown measures will be lifted and what the economic impact is likely to be. Amazon (AMZN) has said it could either make a $1.5 billion in operating profit this year or a $1.5 billion loss.

Morningstar analysts reacted to many of these corporate announcements with downgrades to fair values – and in Tesla’s case, a substantial upgrade.

Even Amazon Has Been Affected

The online retail giant has been one of the most high-profile winners of the lockdown period as shoppers buy essentials – and treats – they can’t currently pick up on the high street. Sales were up 26% in the last quarter versus the same period in 2019. But Amazon boss Jeff Bezos said the company would have to spend $4 billion in the next three months to increase safety measures for its workers and customers. This includes 100 million face masks for employees. “Providing for customers and protecting employees as this crisis continues for more months is going to take skill, humility, invention, and money,” he added.

The company’s shares fell from $2,444 to $2,286 after the results were announced, as investors faced up to Amazon’s cost burden. Morningstar analyst R.J.Hottovy sees the higher costs as necessary to maintain service levels expected by Prime members. But he expects these Covid-19 costs to be temporary and Amazon to build its market share as the crisis eases, with an increase to the fair value likely, too.

Has Shell Done the Right Thing?

Shell’s (RDSB) dividends, which have been maintained since the second world war, were the latest victim of the cash crunch faced by companies in the oil sector. These dividends were expected to represent roughly about 10% of all income paid by UK companies this year, so the money will be missed by investors.

The move was unexpected – and the shares slumped in reaction – but the company said maintaining the $0.47 per share payout was not prudent in the light of plunging oil demand and prices, and the uncertain economic outlook. 

Richard Buxton, manager of the Silver-rated Merian UK Alpha fund, said the decision makes sense in the context of climate change and the costs: “This was clearly a major move on their part but I applaud it and I look forward to more detail about their plans for energy transition."

Morningstar’s Allen Good maintained his fair value estimate for Shell at £29 per share after the dividend announcement.

Tesla Gets an Electric Upgrade

Even as Tesla (TSLA) shares soared into the stratosphere – they doubled in from January to February this year – Morningstar analysts stuck to their view that there was too much uncertainty surrounding founder Elon Musk’s vision to transform driving.  

But after last week’s record profits, analyst Dave Whiston revealed he would be upgrading his fair value estimate from $239 to $731, which is above the current share price. He notes that even a global pandemic can’t affect the way the market values the company. “We think Tesla will continue to provide formidable competition to premium automakers,” he said.

But there was a sting in the tail to the annoucement and it came from a predictable source – Elon Musk said on Twitter on Friday night that he thinks the shares are overvalued – and they duly fell, falling 10% by the close to $701.

Buffett Dumps Airlines - and Builds Cash

Even the world’s most-respected investor wasn’t immune to the sell-off, admitting his company took a $50 billion hit during the March volatility. Investors watch the Berkshire Hathaway (BRK.A) annual meeting closely in normal years but this year in particular people sought guidance from the Sage of Omaha about what happens next.

Buffett revealed that his $500 million investment vehicle Berkshire Hathaway has disposed of all his shares in major airlines. The travel and leisure industry is already under extreme pressure because of lockdown measures, and Buffett’s vote of no confidence will not have helped market sentiment.

And his famous mantra to be "greedy when others are fearful" does not appear to apply in this era of unprecedented uncertainty. “We have not bought anything because there was not anything attractive to do", he told shareholders at the weekend. In fact, he has upped the cash position of the fund to $137 billion during the crisis because he doesn't see any enticing opportunities.

Morningstar's Greggory Warren maintains his wide-moat rating and fair value estimate of $342,500 for Berkshire A stock and thinks the results are more are less in line with expectations, particularly as the company is exposed to the under-fire insurance sector via some of its investments.

 

 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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James Gard  is content editor for Morningstar.co.uk