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As is true with both major car companies and niche manufacturers, China is the future. It was supposed to be not only the largest market but one that would grow rapidly for years. The United States and Europe would be eclipsed in their importance. However, the growth in China has reversed. Many of the world’s largest car companies are in trouble there. At the same time, it appears that Tesla Inc. (NASDAQ: TLSA) is an emerging winner. It was not supposed to be.
Ford Motor Co. (NYSE: F) and its China partners posted a 30% drop in unit sales to 131,060 during the third quarter. General Motors Co. (NYSE: GM) reported 2019 full-year China sales down 15% to just over 3 million units. GM is the second-largest foreign car company in China. The problems of these two car companies come from model lineups that are not just unpopular but unlikely to be replaced quickly enough with new vehicles to change results this year.
Tesla is not only selling cars in China; it is making them there. Elon Musk has even said he will create a car for the Chinese market, and perhaps export it, something none of the large car companies has done. Another advantage for Musk is that making cars in China means it will not have to pay tariffs. That will become more important if the trade war between China and the United States worsens.
While there is skepticism about Tesla’s China future, optimism otherwise has driven the stock to another all-time high. Tesla’s market value is almost equal that of GM and Ford combined. One reason is that Tesla was not expected to sell several hundred thousand cars in the United States, ever. That forecast has been proven wrong.
Tesla’s success continues to be a miracle for some industry experts. It was supposed to be too small to beat large car companies with big balance sheets and dealer networks. That turned out to be untrue in the United States. The first indications are that it will not be true in China either.
The General Electric Company (NYSE: GE) of 2020 and beyond is likely to look quite different from the GE of a decade earlier. The GE of tomorrow is also going to be less diversified and less leveraged. With so many changes in the air, some investors might be wondering why GE was up 5% on the first trading day of 2020. Investors also have every right to wonder if its stock price has risen too far ahead of the actual progress in its ongoing recovery.
GE is no longer a member of the Dow Jones Industrial Average, and its market capitalization rate of $100 billion or so is no longer that impressive in the grand scheme of things. It is not even in the top 60 U.S. stocks by market capitalization within the S&P 500. That said, GE rallied about 50% over the last year, the most annual gain in two or three decades, and there are enough analysts and investors who remain negative that some investors are going to be worried about GE’s 2020 prospects.
With shares close to $11.70, GE has a consensus analyst target price of just $10.78 from the Refinitiv sell-side group. What happened was that GE’s shares rose nearly 30% over the fourth quarter of 2019 and many analysts have not yet adjusted their price targets and expectations ahead.SPONSORED BY JUST ANSWER
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CEO Larry Culp is going to have to keep pressing on costs and working within the GE culture. There have been accusations that GE was knowingly issuing false data on the long-term care exposure. Still, GE somehow managed to beat earnings expectations in recent quarterly announcements in 2019. GE continues to gear down its leverage as well, targeting a ceiling of 2.5 times its Debt to EBITDA ratio. GE is also targeting a ceiling of 4.5 times its Debt to total capital from its lending operations as it continues to shrink that exposure.
Even under Larry Culp, pruning down GE Capital has been easier to discuss than to actually implement. GE has been in the process of ditching some of its biotech efforts and is working toward a full split away from the Baker Hughes acquisition it made (the company is not called “A GE Company any longer).
Despite a mixed analyst community, the consensus estimates are for earnings of $0.61 per share in 2019, followed by $0.67 per share in 2020 — and Wall Street has a consensus of about $0.82 in earnings per share in 2021. That may not make GE sound expensive on the outer year forecast, but many economists and investors are worried about how long the economic recovery can continue before another recession arises. And to be frank, it’s not likely to see that sort of earnings growth rekindled if the economy is not on solid ground.
The bulls have a hard time justifying what the future earnings power will be. GE remains diversified enough that it always seems to have a problem somewhere. The power unit has had problems, and the Boeing woes are weighing on GE aviation sales expectations. GE cannot just keep selling off operations either, otherwise it will have no series of operations that would keep it qualified as a conglomerate.
During December GE was upgraded to Buy from Neutral and the price target was raised to $14 from $10.50 at UBS. The other side of the coin is that JPMorgan remains firm with its Underweight rating and even has GE as a short-sell candidate. JPMorgan is not even thinking GE will post adjusted earnings that are half of what is expected in 2020 and 2021. One question to ask now is if that $5.00 street-low analyst target has just become to pessimistic even fore the grizzliest of the bears.
With GE’s consensus price target almost $1.00 under the shares after a 5% gain on Thursday, it is at least important to consider that GE has a wide range of targets ($5.00 to $14.00 is not narrow at all for close to an $11.70 stock).
Procter & Gamble Co. (NYSE: PG) reported second-quarter fiscal 2020 results before markets opened Thursday. The consumer products maker posted adjusted diluted earnings per share (EPS) of $1.42 on revenues of $18.24 billion. In the same period a year ago, the company reported EPS of $1.25 on revenues of $17.44 billion. Second-quarter results also compare to consensus estimates for EPS of $1.37 and $18.37 billion in revenues.
EPS improved by 13.6% year over year in the quarter, and sales rose by 5%. Gross margins were by 2% and operating profits were up 1.9%. On a currency-neutral basis, EPS rose by 15%.
P&G’s revenue increase was attributed to higher organic shipment volume, increased pricing and “disproportionate organic growth” in the company’s health care and skin and personal care categories where average selling prices are higher than company averages.
CEO David Taylor commented:
Our strong first half results enable us to further increase our outlook for the full fiscal year across each of these metrics and to increase our commitment of cash return to shareowners. Our focus remains on executing our strategies of superiority, productivity, constructive disruption and improving P&G’s organization and culture to deliver balanced top-line and bottom-line growth along with strong cash generation in a challenging competitive and macroeconomic environment.SPONSORED BY DATING.COM
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The company revised its outlook for total sales growth from a prior range of 3% to 5% to a new one of 4% to 5%. The outlook for organic sales growth was increased by a similar amount. Adjusted EPS guidance was raised from 5% to 10% to a new range of 8% to 11% above 2019 totals. P&G also expects to pay more than $7.5 billion in dividends and buy back some $7 billion to $8 billion of common shares in fiscal 2020.
Analysts have forecast full fiscal year EPS of $4.94, an increase of about 9.3% compared with fiscal 2019, and sales of $70.63 billion, up about 4.4% year over year. For the fiscal third quarter, consensus estimates call for EPS of $1.11 and sales of $16.98 billion.
The company’s share price has risen by more than a third over the past 12 months, even including an $8 billion charge against its Gillette razor business last summer. In the first few weeks of 2020, shares traded up about 2.3%. That’s a pretty good share price bump, if P&G could keep it up for the entire year, but it probably would fall short of the current analyst consensus.
Procter & Gamble stock traded down about 2% in Thursday’s premarket session to $123.75, after closing Wednesday at $126.31. The stock’s 52-week range is $92.97 to $127.00, and the consensus 12-month price target is $128.35. The company’s dividend yield is 2.37%.
Tesla Inc. (NASDAQ: TSLA) stock rose again on the back of an announcement that it had delivered 112,000 cars in the fourth quarter. Deliveries for the full year reached 367,500, up almost 50% from 2018. Its stock price, at $443 a share, gives it a market value of $80 billion, almost the total market values of General Motors Co. (NYSE: GM) and Ford Motor Co. (NYSE: F) combined. Each of those companies has annual car unit sales that are multiples of Tesla’s.
One reason for the disparity is that Tesla’s share price is up 114% over that past five years. GM’s is up 2% in the same period, which gives it a market value of $52 billion. Ford’s stock is down 40% in that time, which gives it a market cap of $37 billion. That puts the market value of the two big manufacturers together at $89 billion.
The primary argument for the difference in valuations is that Wall Street views Tesla as among the car companies of the future. In fact, some people say Tesla leads that list. Ford and GM are car companies rooted very deeply in the past. Almost all their cars and trucks are gas driven. They have dealership chains, high product development costs and marketing expenses that are in the hundreds of millions of dollars. Each also has to support several brands and a large number of nameplates under those brands. For Ford, this includes Ford and the battered Lincoln. For GM, this includes GMC, Chevy, Buick and the struggling Cadillac. Tesla has to support one brand, with three basic brands: the Model S, Model 3 and Model X. All the cars Americans don’t want to buy are made by huge manufacturers.
While Tesla has an all-electric car lineup, Ford and GM are just entering these markets. Tesla has a semi-autonomous system in its cars, considered more advanced than the GM and Ford systems. Both Ford and GM admit it will take years and billions of dollars to replace their gas fleets with electric vehicles. For example, Ford has just launched its Mustang Mach-E SUV. It will not be available until late this year. And it will be at least another two years before Ford brings mass-market electric vehicles to the U.S. market.
Tesla’s head start may not last over the next several years as the world’s manufacturers try to overtake it. For the time being, however, that is not going to happen.
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JANUARY NEWSLETTER 2
It turns out that those temporary inflation fears that pop up from time to time get a reprieve every time the price of oil tanks. The price of crude oil futures has now fallen for the fifth straight trading session. The drop has been more than 7.5% this week, and crude oil was last seen down almost 2% on Friday to about $54.60 per barrel in NYMEX crude. That is down from over $62 per barrel as recently as January 7.
The U.S. and China trade pact should have pushed oil prices higher, as should some disturbances in the Middle East. Instead, the coronavirus from the Wuhan Province in China has spread to the United States and other nations. This has acted to shut down part of the local economy in China and threatens to have a broader impact. One other issue hurting oil prices is that there is expected to be an oversupply scenario in 2020.
The lower crude prices have been rather devastating for the energy sector stocks that have already been reeling from an investor boycott as many investors are seeking ESG (environmental, social and governance) themes with no perceived exposure to fossil fuels.
The SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) traded down 2.4% at $20.30 on Friday. That’s down from $22.37 a week ago and from $23.70 at the close of 2019.
The Energy Select Sector SPDR Fund (NYSEARCA: XLE) was down 1.3% at $56.55 on Friday. That’s down from $59.12 a week ago and from $60.04 on the last trading day of 2019.SPONSORED BY DATING.COM
The VanEck Vectors Oil Services ETF (NYSE: OIH) was last seen down 2.7% at $11.63 on Friday morning, compared with $12.67 a week ago and $13.25 at the close of 2019.
Exxon Mobil Corp (NYSE: XOM) was down 0.5% at $66.43 Friday morning, and its 52-week range of $66.05 to $83.49 should show how bad that has been. Investors no longer even care about its 5.2% dividend yield.
Chevron Corp. (NYSE: CVX) was down 1% at $112.00, in a 52-week range of $110.42 to $127.34.
Schlumberger Ltd. (NYSE: SLB) has already reported earnings, and its shares were down 2.1% at $35.65 early Friday. That’s down from $38.77 just last week, and it traded at $37.74 on the last day of 2019.