Newsletter, October 7, 2019
Apple’s transition to a service company
It’s no surprise that Apple [Bloomberg: AAPL:US | market cap USD993.7bn ] is changing. Apple considers the fact that hardware market is getting tougher as smartphones get commercialized and price pressures hinder the maintenance of current margins. To continue developing, Apple has been trying to sell its existing device services and create some new (e.g. Apple TV). The fact that the company is strongly connected with iPhone and other hardware devices, will affect investors. On the one hand, it will take time for them to get used to Apple’s transition to a service business but on the other hand this change opens new revenue channels, making Apple more diversified.
Sector P/Es and EPS growth rates
According to FactSet’s data about business sectors as of 08/29/2019, it is worth mentioning that Information Technology (S&P 500) had estimated P/E ratios for the years 2019-2020 of 20.2x and 18.3x respectively, and the EPS growth for the sector was characterized by an upward trend. EPS growth for a more traditional sector, the one of Industrials (S&P 500), had notable fluctuations in the period 2018-2020 and the P/E ratio for years 2019-2020 was estimated at 16.9x and 14.2x respectively.
Stock market P/Es and EPS growth rates
According to FactSet data as of 29/08/2019, the P/E ratio of S&P 500 in US stood at 17.3x and 15.7x in years 2019 and 2020 respectively. P/E ratio of the Stoxx Europe 600 had settled at 14.2x and 13.0x in years 2019 and 2020 respectively trading at a notable discount compared to US valuations perhaps due to the moderate economic outlook of the European Union. Europe has been trading though at lower P/E levels versus the US for years now. So, there may be additional factors in place for this deviation. EPS growth in 2020 was expected at 10.6% for US and at 9.4% for Europe. The most expensive stock market in Europe was Denmark (P/E of 21.8x in 2019) and the cheapest one was Austria (P/E of 10.5x in 2019).
Following the issuance of a century bond by Austria, US Treasury also considered issuing ultra-long bonds with maturities of 50 or 100 years. The rationale behind this scenario is the current low interest rate environment which allows US to refinance its debt and reduce the annual interest expenses. On the other hand, the success of such issuance is questionable. Pension and insurance funds are in favor of long-term papers that allow hedging interest rate risk however their required yield may be high enough and therefore can adversely affect the US administration decision. A survey conducted by JPMorgan Chase estimates that the expected spread of a 50-year bond over the 30-year would be around 10-20bps.
Key rates of the major Central Banks and Monetary Policy
Central Banks worldwide are lowering interest rates in order to increase money supply. The reason behind this decision is a need to enhance low growth rates and market expectations. In the last month, China lowered the 1-year loan prime rate by 5bps, from 4.25% to 4.20%. United States cut Federal Funds Rate from 2.25% to 2.00 and Russia from 7.25% to 7.00%. Brazil made a larger change, by cutting rates from 6.00% to 5.50%. The interest rate of ECB remains constant at the zero lower bound. UK keeps bank rate at 0.75% since August 2018, looking forward to the conditions of the upcoming BREXIT. Finally, the key policy rate offered by Bank of Japan remains slightly below zero, at -0.1%. All these actions are a result of the global volatile economic environment that forces central banks to take more active measures in order to manage the inflation and support growth. However, the question is clear: Will this Monetary Policy counter all the problems or strong fiscal policy is also needed?
Recent Research Reports, Articles & Posts:
Companies recently followed by VRS: Henkel, Plaisio, Laura Ashley, Campari, Safestyle, Thrace Plastics, Netflix, Cenergy, Walt Disney, Eydap, Sarantis, Profile, Siemens, Piraeus Port Authority, MLS, Fourlis, Tesla, Barclays
International Valuation Standards
The International Valuation Standards Council released the new IVS framework that will be effective from 31 January 2020.The IVS Framework consists of General principles for valuers. The new IVS is separate in two sections, the General Standards and the Asset Standards. General Standards describe the requirements for the conduct of all valuation. Asset Standards describe the requirements related to specific types of assets.
Global M&A volumes 2002-2018
According to JP Morgan, in 2018 the M&A market performed the third highest year ever for M&A volume, $4.1 trillion. The number of M&A deals worth more than $10bn rose to 44 achieving 0.38 percent increase, the highest for this decade. Compared to 2017 there was also a spike in the number of deals that were over $250m in 2018, increasing by 7% y-o-y. Several of the key drivers and catalysts of M&A have continued from prior years. Positive global growth, improving cash flows, low cost of debt, investor support and CEO confidence all continued to boost M&A activity. The biggest new tailwind this year was the implementation of tax reform in the U.S., which helped generate incremental cash flows and provided access to overseas funds. Innovation, disruption and the need for growth had also a prominent role.
M&A value in 2019 H1 in Europe
According to the half-year 2019 edition of Deal Drivers EMEA, published by Merger market in association with Merrill Corporation, M&A value in Europe during H1 2019 totaled 354.3 billion euros, down 33% compared to H1 2018 and 20% up compared to H2 2018. The hottest sectors were those of Telecoms, Media & Technology (495 out of the total of 2,486 deals), Consumer (432 deals) and Industrials & Chemicals (424 deals).
Valuators for ERPs
According to the BVR survey regarding which method is used to estimate Equity Risk Premiums, the historical approach dominates with 76% of the total responses. The historical approach includes:
1. Long term supply-side ERP
2. Long term historical ERP
3. Historical ERP
4. Conditional ERP (historical data adjusted for current economic conditions)
Some other popular sources that are used are the Duff and Phelps recommended ERP and the implied ERP of Professor Aswath Damodaran.
Country Risk and Equity Risk Premium
According to Political Risk Services (PRS), the 5 least risky countries (based on twenty-two variables on three dimensions: political, financial and economic) are Norway (89.3/100), Switzerland (88.5/100), Luxemburg (88.3/100), Singapore (86.5/100) and Denmark (84.5/100). Moreover, Aswath Damodaran’s most recent paper on Country Risk shows that the Denmark, Germany, Netherlands, Norway, Sweden, Switzerland, United States, Austria and Finland each had a Total Equity Risk Premium of 5.67%, followed by Australia (5.78%) and Belgium (5.80%). Greece had a Total Equity Risk Premium of 10.75%, being 63th in ranking.
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Please note that this newsletter has been prepared with the valuable contribution of :
AUEB Students’ Investment and Finance Club
www.auebsifc.com | LinkedIn: AUEB Students’ Investment and Finance Club
AUEBS’IFC is research partner of VRS.
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