One Capsule To Rule Them All

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What's going on here?

News broke on Thursday that Irish biotech firm Shire had rejected a $60 billion takeover bid from Japan’s Takeda Pharmaceutical – but rumors of a counter-offer from the Men of the West (a.k.a. US pharma giant Allergan) could mean that the battle for “the Shire” has only just begun… [tweet this]

What does this mean?

Takeda is trying to expand its largely Japan-focused business beyond its home market, with Shire the latest in a series of foreign pharma companies that it’s looked to acquire. While a deal with Shire would catapult the Japanese firm into the US market, it would also be pretty expensive, necessitating lots of borrowing on Takeda’s part.


To make matters worse, Shire may have just gotten even more pricey: on Thursday afternoon, it emerged that Allergan was also weighing a bid for the Irish firm. While Allergan has yet to come forward with an official offer, the prospect of an expensive bidding war for Bag End is looming…

Why should I care?

The bigger picture: Economic conditions in Japan are prompting overseas dealmaking.


Foreign acquisitions by Japanese companies have got a lot more common in recent years, as low interest rates and a shrinking population back home have encouraged Japanese businesses to seek higher returns elsewhere. Japan’s SoftBank, for example, has become a familiar name in the Finimize pages as it slurps up stakes in various tech companies around the globe.

 



For markets: After all the dust settled, shares of Shire were up 6%.


Shire’s stock price has performed pretty dismally over the past year or so, a potential reason for Shire recently selling its cancer drugs business. The hinted-at cash windfall may have placated investors – and, according to some, may also have paved the way for them to begin negotiations over a Japanese takeover of the business. Now, with a bidding war brewing, those shareholders may, like Bilbo, end up making a tidy little packet from their adventures…

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Consumer Not So Goods

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What's going on here?

Three giants in the market for consumer goods – Unilever, Nestlé, and Procter & Gamble – all reported quarterly earnings on Thursday. And while they tried to throw a few Easter eggs into the mix, investors weren’t thrilled…

What does this mean?

Even though the trio all reported growth in their quarterly sales compared to the same time last year, shares in all three were either down or flat as investors seemed to spot the elephant in the room: the pricing dilemma.


While consumer goods companies used to have a good deal of clout when it came to setting the prices at which they sold goods to retailers, a number of factors are now preventing them from raising prices as much as they’d like. Without that “pricing power”, the only way they can grow their profits is by selling more stuff (which takes time) or by scaling up through mergers & acquisitions – a potential motive for Procter & Gamble’s acquisition of Merck KGaA’s consumer health branch, also announced on Thursday.

Why should I care?

The bigger picture: Investors tend to like share buybacks.


Unilever said on Thursday that it would buy back stock worth $7.4 billion from investors. Buybacks are typically viewed positively by investors, as they simultaneously demonstrate management’s confidence in the future prospects of the company (because they’re buying shares) and create demand which can help to push the share price up. Furthermore, those investors who don’t sell could end up owning a proportionally greater share of the company’s future profits (since there are then fewer shares on the open market).

 



For markets: Some investors may have seen past the headlines.


Based on Thursday’s share price activity, investors might be looking past the companies’ attempts to spice up their earnings reports and instead focusing on their challenging pricing dynamics. The pressure definitely seems to be on at Unilever, which successfully fended off a takeover attempt from Kraft Heinz last year and promised its shareholders that it would work to do better.

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Nobody Puts Baby In A Corner

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What's going on here?

On Wednesday, Danone, producer of Activia yogurt and Evian water, reported its fastest first-quarter sales growth in five years. The refreshing result pleased investors – they sent the stock up 2%.

What does this mean?

Paris-based Danone grew its “like-for-like” sales (which exclude the impact of currency swings and new acquisitions) by 4.9% compared to last year – ahead of expectations. In addition, the company reported that sales volumes had grown by 1.1% – meaning Danone isn’t just selling more expensive products, but that customers are actually buying more of their yogurts, baby milks and waters.


Danone’s infant formula business in China was a big contributor: sales grew by 50% in the period, driven by a rising birth rate (following relaxation of the one-child policy in 2016) and the continued urbanization of China’s growing middle class, who’re increasingly shopping for well-known international brands. In Europe, where Danone had been struggling in its core dairy business, Activia’s recent revamp helped the region improve its own growth trajectory, although it still shrunk slightly.

Why should I care?

For markets: Delicious growth from Danone puts the spotlight on Unilever and Nestlé.


Packaged food companies have had a tough time growing amidst weak global price inflation. Activist investors have amassed stakes in the likes of Danone and Nestlé, and put pressure on them to deliver better sales and profit growth. These and other investors will keep a close eye on the results of its peers to see whether Danone’s results are a company-specific splash or a rising tide that’ll lift all boats.

 



The bigger picture: Baby milk is the formula for Danone’s success in China [tweet this].


Following a 2008 scandal related to domestic producers, consumers are understandably keen to ensure their babies receive only safe, approved milk formula. Danone is likely to benefit as an “international” brand – its products are likely to be seen as safer by a rising middle class of shoppers who increasingly use the internet to research and buy perceived high-quality products.

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Money In The Banks

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What's going on here?

Continuing last week’s trend, big investment banks Bank of America, Goldman Sachs and Morgan Stanley reported first-quarter results this week. Despite strong results across the board, investors shrugged – and so did the shares.

What does this mean?

Morgan Stanley reported record profits in the first quarter, with the firm firing on all cylinders: its stock-trading business, its oft-maligned fixed-income trading segment (which includes things like bonds, which pay investors a “fixed” amount) and its asset management arm (i.e. investing others’ money, for a fee) all grew in the period.

 



These trends were mirrored in results from Goldman Sachs and Bank of America: both saw growth in their trading activities (stocks in particular) and tax benefits from recent US tax reform.

Why should I care?

For markets: Buy the rumor, sell the fact?


As was the case for Citigroup, Wells Fargo and JPMorgan Chase last week, a lot of the good news reported was expected by investors, and was likely already reflected in their share prices. With no further good news to surprise investors in Goldman Sachs, Bank of America and Morgan Stanley, some may have chosen to sell their shares and take profits – helping send Goldman’s shares down 2% after it released results on Tuesday (BoA on Monday and MS were broadly unchanged post results).

 



The bigger picture: Diversification helps banks perform well through an economic cycle.


When the current CEO took over Morgan Stanley in 2010, he embarked upon a mission to diversify its revenues away from highly volatile trading activities and towards the more dependable revenues of asset management. Nowadays, about a third of the bank’s revenue comes from those activities. This means Morgan Stanley can reap the rewards when the going’s good in its trading business, while also having a stable income from other areas when the going gets tough (as it has been for the last few years).

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So Good They Named It Twice

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What's going on here?

Johnson & Johnson (J&J), the world’s largest healthcare company (and owner of brands like Neutrogena and Listerine) reported strong vital signs in its latest quarterly health check on Tuesday, beating investor expectations and giving its stock a booster shot.

What does this mean?

J&J’s pharmaceuticals division, which accounts for about half of the company’s sales, was in rude health last quarter. Investors were concerned they’d see a slowdown as top-selling arthritis drug Remicade faced competition from cheaper alternatives (known as generics), but blistering sales growth in areas like cancer treatment more than offset the declines.


The company also announced plans to reinvest proceeds from recent US tax reform into research and development as well as capital expenditure (a.k.a. investments in property and equipment) – to the pulsating tune of $30 billion over the next four years. J&J aims to use this cash to improve its healthcare and manufacture new technologies in the US.

Why should I care?

For markets: Good medicine – but investors aren’t convinced it’s a wonder drug.


Alongside stronger-than-expected results, J&J modestly raised its target for 2018’s revenue [tweet this]. Crucially, however, it left its expectations for profits unchanged – which may have disappointed investors who hoped to see more sales translate into more profit. Johnson & Johnson’s shares fell by almost 1% on Tuesday.


The bigger picture: Companies may be using acquisitions to keep drug prices higher in the future.


The spate of acquisitions in healthcare over the last few years has seen “big pharma” gobbling up biotech companies focused on niche treatments or innovative ways to treat common ailments. One reason for this could be that owners of the rarest treatments can often charge high prices that reflect the scarcity of their products (at least, over the life of their patents), while other drugs may struggle to justify “price-gouging”. This has become a pressing issue lately, with US President Donald Trump expected to reveal proposals to tackle high prescription drug prices later this month.

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China Goes Shopping For A Strong Economy

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What's going on here?

Data out on Tuesday showed China’s economy brushing off trade war worries to grow by 6.8% in the first quarter of the Year of the Dog. The country’s long-heralded shift to consumption-led growth started to show as consumers wagged their tails – and their wallets.

What does this mean?

Consumers breathed fire into the Chinese economy – accounting for almost 80% of the growth in the period. They also breathed “fire.com” (with ecommerce sales growing by 35%) and “Fire, PhD” (with education investment up more than 25%). This offset weaker-than-expected growth in industrial activity: overall, economic growth was in line with market expectations.

Why should I care?

For markets: The outlook may not be so rosy for the People’s Republic.


Consumption typically contributes more to China’s growth in the first quarter compared to the rest of the year (partially due to Chinese New Year driving up spending), so investors look to other industries to pick up the slack as the year goes on. This year that may be a challenge, given both trade tensions and domestic infrastructure projects being scaled back to keep debt levels under control. Relatedly, China’s announcement this week of a lower “reserve ratio” (the proportion of deposits banks have to keep on hand, as opposed to loaned out to customers) should help provide support to small businesses and return some of the funds that banks owe to China’s central bank.


The bigger picture: China is opening up to the rest of the world.


China recently reiterated its promise to become a more open market. In particular, President Xi aims to increase imports, expand intellectual property protection and lower foreign-ownership limits in sectors like manufacturing – the latter potentially being golden news to the likes of Tesla, Volkswagen and Ford. Previous rules limited non-Chinese auto manufacturers to a maximum 50% ownership of any China-based business. From this year, however, electric vehicle manufacturers will be allowed full ownership, extending to all car makers by 2022.

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The Best Thing Is Sliced ‘Bread

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What's going on here?

Shares of Britain’s Whitbread, owner of Costa Coffee and Premier Inn, jumped over 7% on Monday after Elliott Advisors, the US activist investor, revealed it had become the company’s largest shareholder.

What does this mean?

Whitbread, formerly a big brewing company, owns a collection of businesses – the two largest of which are Costa (a big rival to Starbucks and other coffee chains in the UK) and Premier Inn, a budget hotel chain.


According to the Financial Times, Elliott wants Whitbread to split up the company and make the two divisions entirely separate entities. It’s not the first activist fund to buy shares and push for this change at Whitbread – but Elliott’s revelation (it has a history of successful investor activism) certainly got the market’s attention.

Why should I care?

For markets: Investors tend to prefer “pure-play” investments.

Elliott’s logic appears to be that Whitbread is less valuable than the sum of its parts. The argument is that by separating its businesses, investors can choose which one(s) they want to invest in. Both should, in theory, subsequently become more popular with investors – and thus more valuable.


The bigger picture: Elliott Advisors holds considerable sway over many of the world’s biggest companies.

Wherever there’s a takeover or turnaround opportunity, there’s a decent chance that Elliott isn’t far away. It was instrumental in forcing the brewer AB InBev to pay a higher price than it initially offered for SABMiller; just recently, it helped force Qualcomm agree to increase its offer for rival chipmaker NXP. Elliott is also currently pushing mining giant BHP Billiton to change its corporate structure, and is involved in a swathe of other potential deals, including a battle for control of Telecom Italia with French media giant Vivendi. CEOs and board members at virtually all major companies are compelled to plan for a potential visit from the Elliott suits (among other big activist investors) when plotting out their strategies.

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A Netflix Unoriginal

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What's going on here?

Netflix released its latest financial results on Monday – and it once again added more subscribers than Wall Street expected, helping to drive its stock price up more than 5%.

What does this mean?

In this past quarter, Netflix added close to 2 million US subscribers and about 5.5 million international subscribers – almost a million more than expected. Netflix also increased its prediction for its profit next quarter, which likely contributed to hungry investors boosting its stock price.


The blockbuster (but definitely not Blockbuster) performance is a faithful remake of the final quarter of 2017, which also saw Netflix blowing past investors’ expectations. That has helped the stock rise 60% this year alone [tweet this] (while the whipsawing US stock market overall is currently sitting around where it was on January 1st).

Why should I care?

The bigger picture: Traditional cable companies are being forced to bring Netflix onto their platforms.

If you can’t beat ‘em, join ‘em. Comcast, one of America’s largest cable television companies, will soon offer Netflix as part of its standard bundle. In the near term, this might convince some Comcast customers to refrain from “cutting the cord” (because they can get cable and Netflix from the same source), but it will also likely add to Netflix’s all-important subscriber growth – and perhaps increase the likelihood that those customers eventually do cut to black ‘n’ red.


For markets: The stock price is already reflecting a lot of optimism.

Netflix’s valuation as a company suggests that investors are betting it will both substantially grow its subscriber base and increase the amount it charges each subscriber in the years to come. Netflix also borrows a ton of money to fund its hugely expensive content production (which will total almost $8 billion this year). While Netflix is undoubtedly a revolutionary company, the upside in owning its stock is arguably more limited than it has been in the past – and the risks remain Titanic.

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Big Banks Fail To Impress

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What's going on here?

Major US banks including JPMorgan Chase, Citigroup and Wells Fargo reported first-quarter earnings on Friday that beat expectations – but investors didn’t seem to be that into it…

What does this mean?

There was plenty to be pleased about in Friday’s results: recent tax reforms have helped increase profitability at the banks, and rising interest rates mean that they’re earning more from lending out money to customers. On top of that, markets’ roller coaster ride in the first quarter helped banks’ stock-trading departments add to their revenues as they executed more trades (banks charge a small commission for each trade they process).

Why should I care?

For markets: It appeared that markets were already expecting all that.

Shares in JPMorgan fell by more than 2%, Wells Fargo was down 3% and Citigroup was down 2% on Friday. Bank stocks have generally increased some 20-30% over the past two years as investors have bid up their price, enticed partly by moves like frequent share buybacks and partly by the rising interest rate environment. The lack of anything especially shiny and new in this batch of earnings – and some disappointing news on lackluster loan growth in spite of tax reforms – may have encouraged the selloff.



The bigger picture: Trading just ain’t what it used to be…

While JPMorgan reported record revenues from its stock-trading division, banks’ revenues from trading as a whole have been declining for years. One interesting reason is that regulators around the world are pushing for more transparency in financial markets. In Europe, for example, the recent MiFID regulation ensures that all kinds of financial products are priced in an open and transparent way. This is probably good for society in the long run (honesty is the best policy!), but it does mean that banks might find it harder to overcharge for certain products (as, in theory at least, anyone can figure out if they’re paying a fair price).

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Ad Giant Loses Its Head

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What's going on here?

Sir Martin Sorrell, iconic CEO of the world’s largest ad agency, WPP (which works with more than half of America’s Fortune 500 companies), said on Saturday that he was stepping down, potentially heralding a new era for the marketing behemoth.

What does this mean?

Like many other advertising firms, WPP has struggled in the digital age as overall spending on advertising has declined (see below) – and it recently saw its shares hemorrhage in value as it warned investors that it wouldn’t earn as much in profit this year as it had forecasted.


On top of that, a scandal erupted in which Sorrell was accused of personal misconduct and misusing company funds. While the company officially exonerated him, the debacle hurt his standing with shareholders – and now, he’s announced that he’s resigning.

Why should I care?

For markets: This might facilitate the split-up of WPP. [tweet this]

WPP is a huge marketing conglomerate, and some shareholders have been pushing for years to have the sprawling firm divvied up into different companies, some of which could then be sold off to other ad or media firms. Sorrell was never big on the idea, apparently – who wants to see their empire split up into small fiefdoms? – but now that he’s out of the picture, this is a more likely possibility.



The bigger picture: Recent scandals have raised questions about the future of digital advertising.

One reason why traditional advertising firms are on the decline is that companies can now cheaply and more directly market their products on social media platforms. Importantly, many platforms – like Twitter and Facebook – are free because they earn a substantial chunk of their revenue from this digital advertising. In the wake of the Cambridge Analytica scandal, there was some speculation that large corporations would desert Facebook and reallocate their advertising spending – but in reality, it seems like most companies want to keep the status quo.

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