European markets have opened sharply lower this morning after US markets closed lower for the second day in a row, over concern about progress in China, US trade talks. This weakness also prompted similar softness in Asia markets.

This weakness could well be exacerbated further after investors took fright from a disappointing earnings update from Netflix after US markets closed.

The fallout from trade now appears to be having a much more noticeable effect on company earnings with Germany’s biggest software maker SAP saw its own Q2 numbers miss this morning. Profits were still up, rising 11% to €1.82bn but this was less than expected, with a rise of 14% widely predicted.  

It’s not been a particular good past few months for Royal Mail beset by concerns over falling revenues and over optimistic growth projections the slide in the share price from its peaks all the way back in 2016 saw the shares fall below the IPO price at the end of 2018, to hit a record low in May in the wake of its most recent profits warning, as well as the cut to its dividend.

Competing as it does in such an increasingly digitised world against companies with greater flexibility to cut costs, it was always going to struggle against the likes of UPS and Fedex. The company’s Achilles heel has always been its letters division, where volumes have continued to plunge, and look set to continue to do so. In May management estimated that we could see a further 5% to 7% decline in volumes over the next 12 months.

It’s not all bad news, the company is still profitable, and revenues have continued to grow, however profits have been unable to keep up, while speculation about a possible renationalisation in the event of a Labour government hasn’t helped sentiment, though this seems slightly less likely now, given the current state of the polls.

Since the record lows at 192p, seen in May, the share price has recovered slowly, and should continue to do so as long as there aren’t any further unpleasant surprises.

Today’s Q1 update has seen the company reiterate its outlook for the current financial year, saying that it is trading in line with expectations and profits for the year expected to be between £300m and £340m.

The ability to cut costs hasn’t been helped by the controversy over CEO Rico Back’s pay packet, which prompted widespread criticism and was awful optics. Cost savings are always a tough sell, but become even tougher when the perception is that management aren’t sharing in them, and this is something that needs to change.  

Airlines have been struggling with a variety of issues over the past few months, a rising oil price, too much capacity as well as the controversy over the Boeing 737 MAX which may well have deterred some of a more nervous disposition from flying at all, choosing to stay at home instead. Short haul airlines in particular have struggled, see Flybe, Monarch and Thomas Cook being cases in point with even Ryanair unable to grow its profits.

At the end of the first half of its fiscal year easyJet insisted that it would hit its full year pre-tax profit target of £423m. Today’s Q3 update from Easyjet had been expected to see that revised slightly lower to just above £400m, however management were able to surprise with a much more positive update.

Revenue and profit guidance was kept unchanged helped by a rise in total revenue per seat of 1.3%. Passenger numbers rose by 8% in the quarter helped by a rise in capacity, while total revenue came in at £1.76bn, a rise of 11.4%

In the retail sector the tough environment is also hitting margins in the on-line space after ASOS downgraded its full year profit before tax estimates from £55m to between £30-£35m, claiming that sales in Europe and the US were held back by operational issues, and higher restructuring costs .

As a result ASOS share price has plunged over 20% on the open, wiping out most of this year’s share price gains in the process. While this is disappointing its hardly the end of the world, but such are investor expectations these sorts of earnings misses tend to get magnified in the short term.   

As far as the actual numbers are concerned in the UK retail sales showed a rise of 16%, with total group revenues rising 13% for the ten months to 30 June to £2.23bn, despite the logistical issues in the US and Europe, the company still see decent sales growth, even if Europe was disappointing with a modest 5% increase.

The pound has continued to rebound after hitting a two year low yesterday, helped by a comment from the EU’s Michel Barnier that he was ready to work on alternative arrangements in respect of the Irish border. The last few days has seen sterling slip on the basis that a no deal Brexit is becoming more likely with each passing day. The fairly positive economic data has been largely ignored with political factors offsetting any uplift from the low unemployment rate and decent wage growth. Today’s retail sales numbers for June might undermine that sentiment later this morning, with many expecting another negative number of -0.3% on the back of the -0.5% seen in May, and 0% in April. This seems unduly pessimistic given the decent weather in June, so there is an outside chance we could get a positive surprise.

US markets underwent another negative session yesterday, with the S&P500 falling sharply back below the 3,000 level, and could well open lower later today as investors absorb a rather disappointing earnings update from Netflix.

It has always been well understood that the growth in online streaming is primarily driven by growth in subscriber numbers, as well as the addition of new online content. Netflix has been at the forefront of that, investing heavily at a rate faster than it is able to add these new subscribers.

To deal with this Netflix has been increasing prices to help compensate and last night’s numbers did show a rise in profits, while revenues rose 26% year over year to $4.92bn. So far so good, however the latest quarter showed a sharp miss in subscriber growth with US seeing a loss of 126k subscribers against an expected gain of 352k. More worryingly international subscriber growth slowed to 2.83m new subscribers which on the face of it looks good, however it fell well short of expectations of 4.81m.

Time will tell whether this quarter is a temporary blip or whether having reached well over 150m total subscribers, their ability to add new users at the same growth levels as previous quarters has run its course given the growth of competition in this space. Stranger things have happened!

 

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